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Governing Oil Inc. : socially responsible investment and the new governance gap Hamilton, Ashley N. 2006

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r GOVERNING OIL INC.: SOCIALLY RESPONSIBLE INVESTMENT AND THE NEW GOVERNANCE GAP by ASHLEY N. HAMILTON B.A., The University of British Columbia, 2004 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS in THE FACULTY OF GRADUATE STUDIES (Political Science) THE UNIVERSITY OF BRITISH COLUMBIA December 2005 © Ashley N. Hamilton, 2005 Abstract C i v i l society groups have had some success, in recent times, at using socially responsible investment (SRI) activism to influence the behaviour of western corporations that undertake oil and gas operations in countries where human rights and environmental concerns pose high risks for investment. However, similar initiatives have been largely unsuccessful at governing the behaviour of state-owned firms that are increasingly moving their operations overseas and operating in similarly risky situations. Very little academic research has examined the governance implications of the transnationalization of state-owned firms or assessed how activists attempt to influence the behaviour of these corporations through non-state mechanisms of governance. The intention of this paper, therefore, is to contribute to an area of research that so far, is poorly developed and understood in political science. A comparative look at two SRI campaigns aimed at the independent Canadian oi l company Talisman Energy, and the state-owned firm China National Petroleum Corporation w i l l demonstrate that SRI activism has forced a wedge between those firms held accountable to market forces, and those who enjoy a quasi-state status. Western corporations driven by their profit motive are pressured by activists to demonstrate behaviour identified here as upward competitive advantage, where they are increasingly encouraged to compete with other firms of similar nature by adopting more comprehensive and transparent C S R policies. In turn, their comparatively less-transparent counterparts enjoy a downward competitive advantage, benefiting from their ability to evade market-based governance tactics. The result is a growing governance gap in the o i l industry that w i l l likely become more concerning as large state-owned oi l corporations increasingly move their operations overseas. A l l is not lost however, as SRI activism has had small successes in inserting corporate social responsibility considerations into the decision-making apparatus of the New York Stock Exchange and subsequently onto the agendas of CEOs and powerful investment management firms. The small successes of SRI campaigning demonstrates an increasing desire and ability of non-state actors to engage in and wield powerful market mechanisms of governance, and as a result of their efforts, activists have created a new space for debating, contesting and influencing the outcomes of global governance. Table of Contents Abstract ii Table of Contents i i i List o f Abbreviations v Acknowledgements vi Chapter One Introduction 1 Methodological Issues 5 Structure of the Thesis 6 Chapter Two Governance and Global Corporate Power 8 Global Governance 9 Violence and Human Rights in the Extractive Industry 12 Corporate Social Responsibility in the O i l Industry 13 C S R and the Governance of Corporations 19 Chapter Three CSR and the Governance of Talisman Energy 24 Thicker than Blood: O i l and War in Sudan 25 The Controversy , 28 The Evidence 29 The Response 33 The Campaign 35 SRI Activism and the Governance of Talisman Energy 40 Chapter Four CSR and the Governance of CNPC 44 The ' G o Out' Strategy and Chinese O i l Investments Overseas 45 China National Petroleum Corporation 48 The Controversy 52 The Campaign 56 SRI Activism and the Governance of C N P C 61 i n Chapter Five Socially Responsible Investment and the New Governance Gap 64 The Governance Gap 65 New Spaces for Non-State Governance 70 Limitations and Conditions for Success in SRI Act ivism 72 SRI as Governance 76 Chapter Six Conclusion 83 Works Cited 89 Appendix A Outward Foreign Direct Investment 1990-2004 96 Appendix B Sudan Map of O i l Concessions (2002) 97 Appendix C Updated List of O i l and Gas Concession Holders (2004) 98 Appendix D Global O i l Reserve Ownership by Corporation Type (2000) 98 Appendix E Top 15 Global O i l and Gas Companies 99 Appendix F Top O i l & Gas Corporations from Developing Economies (2003) 99 List of Abbreviations A F L - C I O American Federation of Labour and Congress of Industrial Organizations B P British Petroleum CalPERS California Public Employees' Retirement System C E O Chief Executive Officer C N O O C China National Offshore O i l Corporation C N P C China National Petroleum Corporation C P E C C China Petroleum Engineering and Construction Corporation C S R Corporate social responsibility DJSI Dow Jones Sustainability Index EITI Extractive Industries Transparency Initiative G N P O C Greater Ni le Petroleum Operating Company G R I Global Reporting Initiative I C C A F Inter-Church Coalition on Africa IPO Initial public offering N G O Non-government organization N Y S E New York Stock Exchange ODI Overseas direct investment O E C D Organization for Economic Cooperation and Development O N G C Videsh O i l and Natural Gas Corporation Videsh Ltd. (India) P I M Petroleum Industry Ministry (China) S E C Securities and Exchange Commission S O E State-owned enterprise SRI Socially responsible investment T I A A - C R F Teachers Insurance & Annuity Association - College Retirement Fund U N United Nations U N C T A D United Nations Conference on Trade and Development U N H C R United Nations Commission on Human Rights W T O World Trade Organization v Acknowledgements This thesis could not have been completed without the support of my family. Thank you to my mother for all the late night pep-talks, and to my father for pushing me to finish. A n d of course, thank you to my supervisor, Peter Dauvergne whose ongoing patience and support has been instrumental to my success. v i CHAPTER ONE: Introduction Corporations are powerful vehicles of wealth-creation, economic integration and capital accumulation whose size and global reach have become important topics for political and economic analysis. Most research to date focuses on the influence and global reach of large corporations from industrialized countries, their characteristics, patterns of investment and global political and economic impact. However an increasingly important trend in corporate internationalization is emerging: globally competitive state-owned corporations from the Third World have started to expand their operations overseas at a rapid rate (see Appendix A ) . O f particular interest is the internationalization of corporations from large developing countries such as China and India, whose economic growth in recent years has enhanced their capacity to move large-scale corporate operations overseas.1 A n d while political economists have been tracking the movement of these firms since the 1980s, examining the motivations behind Third World corporate internationalization (see Kumar and M c L e o d 1981; L a l l 1983), the trend has so far been under-researched by academics concerned with the politics of global governance and corporate social responsibility. This thesis seeks to fill a gap in the literature, first, by assessing the impact of these new corporate actors on global mechanisms of governance, and second, by examining how non-state actors seek to govern their behaviour overseas. Using corporate social responsibility (CSR) policies as a measure of governance, I w i l l investigate how socially responsible investment activism can influence the policies and practices of transnational corporations in the oi l and gas industry. M y analysis w i l l compare the behaviour and policies of two types of corporate actors identified here as "bottom feeder" oil corporations. This term is used by Scott Pegg (2006) to ' U N C T A D (2005a) reports that outward direct investment (ODI) from developing countries grew seven-fold between 1990 and 2003, and continues to expand at a rate that is significantly more rapid than initially expected. ODI from developing countries is growing faster than ODI from developed countries, and China, India, Brazil and Mexico are highlighted as the next big investors, behind the established overseas investors of Hong Kong, Korea, Singapore and Malaysia. refer to a set of corporations that generally do not recognize or adhere to the standards and expectations of responsible corporate conduct. Bottom-feeder corporations tend to invest in risky states where issues of war, violence, human rights abuse and environmental impact are particularly salient, and where larger, and more accountable and responsible companies are often unwilling to go. Within the bottom feeder category, Pegg identifies three types of corporations: second-tier western multinationals, which seek out investment opportunities in risky states where the integrated and globally competitive 'super majors' such as Shell, B P and Exxon cannot or w i l l not invest; state-owned Asian corporations that operate under lower standards and often engage in unethical behaviour overseas; and small privately-owned firms that specialize in militarized commerce and actively seek out investment opportunities in war zones and unstable states. The research presented below focuses on the first two categories of bottom feeder corporations, examining the impact of C S R governance mechanisms on corporate policy and behaviour, and assessing what the growing influence of globally competitive state-owned firms may mean for governance in the oil industry. For the purpose of this paper, C S R is understood as an umbrella term to refer to the general international expectations that businesses must recognize and mitigate their environmental and social impact, and conduct their relationship with society in a responsible manner. This is a highly contested concept, yet it has gathered significant momentum and is increasingly being used by activists, N G O s , international organizations and corporations as a framework for identifying and defining the rights/responsibilities nexus of transnational corporations. More recently, activists have mobilized C S R as a mechanism of governance by using socially responsible investment (SRI) activism to influence the policies and practices of firms operating overseas. SRI activism is a growing movement in the shareholder and investment communities and can be viewed as an articulation of the broader international 2 expectations of C S R . It is used in this context to describe the act or acts of using shareholder pressure to target a specific company for unethical or irresponsible business conduct in order to change corporate policy or practice and bring it in line with the expectations laid out by C S R . Employing SRI activism as an indicator of C S R governance, the thesis presents two case studies detailing the attempts of SRI activists to influence the behaviour of transnational corporations operating in Sudan. In the case of Talisman Energy, Canada's largest independent oi l firm, activist groups were able to use shareholder pressure to depress the company's share price enough to eventually persuade it to pull out of Sudan. The campaign was a success to the extent that SRI campaigning had a significant and measurable impact on corporate behaviour, prompting the company to adopt more comprehensive and transparent C S R policies. But the campaign's claims of success must be qualified. Some analysts have called Talisman's withdrawal a "hollow victory" leading not to better practices on the ground, but to increased investments from less-constrained state-owned firms from China, India and Malaysia who operate under lower standards and have a higher threshold for environmental and social risks. The second case of China National Petroleum Corporation ( C N P C ) demonstrates how state-owned firms are better able to withstand pressure from market j mechanisms of governance. Similar SRI activist campaigns targeting the Chinese state-owned firm have had comparatively little impact on its operational activities in Sudan. This result suggests that there may be substantial limits to the ability of C S R governance mechanisms to influence the behaviour of these increasingly important global actors. Based on the details of these two SRI campaigns, I advance two central arguments. First I suggest that the SRI campaigning activities have created a wedge between two types of bottom feeder corporations. Western companies that are generally more accountable to market forces have been pushed into adopting behaviour identified here as upward competitive 3 advantage, where companies come under increasing pressure to out-compete other western firms by adopting more comprehensive and transparent C S R policies. On the other hand, state-owned firms display a downward competitive advantage, enjoying the benefits of their comparative invulnerability to SRI campaigning tactics. As a result of the upwardly mobile C S R behaviour of western corporations and the comparative downward behaviour of state-owned firms, a growing governance gap has emerged in the international oi l industry whereby market mechanisms of governance fail to influence the behaviour of some increasingly important transnational corporate actors. Second, I argue that despite the inability of SRI activists to influence the behaviour of all corporate actors in the bottom-feeder category, activists can still claim some small victories for C S R . The successes stem from the ability of non-state actors to use SRI activism to awaken shareholders, top corporate officials, investment management firms and key economic decision-making bodies to the importance of C S R issues. B y framing human rights concerns in the language of investment risk and financial sustainability, and by demonstrating the real effects of SRI activism on corporate reputation and profits, campaigners were able to bring about small, but significant change in how companies, investment firms and capital market regulatory bodies define and evaluate risk. In doing so, activists have succeeded in creating a new political space for articulating criticisms and concerns related to C S R and corporate accountability. These small successes may have a significant impact on both how oi l companies think about C S R , and how activists can influence their behaviour overseas in the future. Further, in the era of complex economic integration, there is potential for important institutional and behavioural changes in the west to have an overall positive effect on the governance of large quasi-state entities; as state corporations continue to globalize and seek out investment opportunities and lucrative capital markets, engagement in the established 4 governance framework w i l l increasingly subject less-accountable state-owned corporations to SRI activism and the constraints of C S R . The investigations and arguments advanced in this thesis are somewhat unique. Very few studies to date have attempted to assess the impact that globalizing corporations from the Third World may have on the governance mechanisms of C S R . Similarly, little has been written about the attempts by non-state actors to influence the overseas behaviour of Third World corporations, or how the mechanisms and strategies used to govern these firms may differ from the governance tactics used to influence western oi l companies that are more accountable to market forces and shareholder pressure. This is an important area of research as state-owned corporations increasingly move their oi l exploration and production activities overseas into countries where environmental and human rights issues are of vital concern. It is also an area of research that is poorly developed in the field of political science. Therefore this thesis seeks to fill a gap in the literature by engaging in a theory-building process and contributing to the theoretical and practical understanding of how non-state actors employ market-based mechanisms of governance in order to influence the behaviour of transnational l oi l corporations. Methodological Issues Some methodological issues arise from examining C S R and SRI activism in the context of oi l extraction. I have chosen to focus on oi l because its value, physical characteristics, global strategic importance and association with violence in developing countries make a compelling case to argue for the need for more effective governance mechanisms to influence and monitor corporate policy and practice in developing countries. O i l is particularly unique as a natural resource requiring extensive investments, infrastructure and scientific expertise, and 5 oil exploitation creates very distinct political, economic and social dynamics at both the state and local level (Karl 1997; Ross 1999; Watts 2001; Le Bi l lon 2001; Kar l 1999). In focussing on oil corporations for my case studies I acknowledge that there may be some objections regarding the applicability of my arguments to cases that do not specifically discuss the impact of o i l and gas exploration and production. However, it is not my intention to set out a grand design for governing corporate behaviour in all resource sectors, but rather to point out some of the larger issues raised by the increasing global reach of these quasi-state entities and the subsequent implications for the governance of corporate activity. Structure of the Thesis A detailed examination of each case w i l l provide the context for discussing some of the larger issues of corporate social responsibility and global governance. Following a short literature review, chapter three presents the case of Talisman Energy. The chapter provides an overview of the politics of oi l extraction in Sudan, before examining how SRI activists were able to pressure the Canadian company to eventually withdraw from its investments in 2003. Chapter four w i l l outline some of the issues raised by the rapid transnationalization of large Third World firms before analyzing the attempt made by SRI activists to influence the behaviour of C N P C by targeting the company's debut on U S capital markets. Finally, chapter five synthesizes the cases discussed in chapters three and four, outlining some of the problems and prospects of using SRI activism as a governance mechanism in the international oi l industry. The conclusion w i l l sum up the main findings and arguments of the thesis and present some directions for future research. The topic presented here is distinctive in that it lies at the intersection of many different areas of research, drawing on the literature of global governance, corporate social 6 responsibility, corporate internationalization, shareholder activism and the politics of resource extraction. Little is known about the political effects of corporate expansion from the Third World or the attempts by activists to use market-mechanisms to influence the activities of transnational firms. The next chapter therefore provides the theoretical context for my discussion, arguing for a more comprehensive examination of the governance of state-owned oi l corporations and the effects of socially responsible investment campaigning. 7 CHAPTER TWO: Governance and Global Corporate Power The purpose of this chapter is to situate my discussion of the governance of so-called 'bottom-feeder' oil corporations in the relevant academic literature. To this end, the chapter w i l l outline my theoretical perspective on the issues of governance and corporate social responsibility in the oil industry. The gap in the literature here is concerning in light of shifting global patterns of production and consumption and the subsequent expansion of large state-owned oil enterprises overseas. The chapter wi l l argue for the need to develop and expand the C S R literature to better incorporate the emergence of new globally-competitive corporate actors from the Third World. A more comprehensive understanding of the behavioural effects of socially responsible investment campaigns may in turn lead to improved ways of governing the behaviour of oi l firms operating in developing countries. The chapter w i l l begin with a discussion of global governance theory and present the broader theoretical context in which I w i l l be examining issues of SRI activism, corporate social responsibility and oi l industry governance. Second I w i l l outline the empirical reasons for examining issues of corporate social responsibility in the oi l industry, highlighting the industry's poor social and environmental performance and its historical links to violence and human rights abuse. I w i l l then provide an overview of the C S R literature, outlining my definition and use of the term as well as the reasons for using SRI activism as an analytic tool for examining and assessing governance in the oil industry. The chapter w i l l conclude by . arguing for a more comprehensive examination of the governance implications of the overseas expansion of large oi l firms from the Third World. 8 Global Governance I intend to approach this topic from a global governance perspective. In doing so I seek to highlight how socially responsible investment campaigning is used by activists as a tool for governance in the oi l industry, to explain what the effects of this type of governance are, and to suggest the ways in which SRI activism is able to insert corporate social responsibility issues into the agendas of key political and economic decision-makers. Looking at the issue through a global governance perspective focuses the discussion on larger processes and problems that occur beyond state-based political and economic dynamics. As a concept, global governance theorizes a system of control or rule that is exerted and maintained in the absence of an established legal or political authority (Rosenau 1995: 15). In this sense, it is a type of "governance without government"2 that, as James Rosenau argues, is constituted by "the pressure of an active or mobilizable public, and/or the use of careful planning, good timing, cleaver manipulation and hard bargaining" (Rosenau 1995: 15). This view describes dynamics whereby actors vie for power and influence in order to shape the process and outcomes of governance. Control and steering mechanisms are used by some actors to modify the behaviour of others in order to exert some type of governing control and system of rule in accordance with their own interests and beliefs (Rosenau 1995: 14). Rather than argue that there exists one overarching trend, pattern or trajectory of behaviour, the global governance literature seeks to incorporate the complexities and contradictions that characterize the international system (Hewson and Sinclair 1999: 7). A s Robert Latham (1999: 33) points out, a great range of diversity in the global system makes consensus around governance more problematic, specifically because there are different ways in which the current circulation of international norms and control mechanisms are interpreted 2 This term was first used by Rosenau and Czempeil (1992). 9 and practiced. For example, the post-Washington consensus on the patterns and trajectories of global economic governance are contested and resisted by anti-globalization activists and socially responsible investment campaigners who attempt to alter the current form of governance according to their own beliefs and interests. It is my assertion that there is value in emphasizing the view that global governance is controversial and contested, as it allows us to integrate the plea made by Latham to critically engage with global governance by investigating what may work against governance and what actors may in fact lie outside the governance grid (Latham 1999: 37). A concept of this nature is particularly useful when examining the transnationalization of business because it allows us to theorize and incorporate international corporations and non-state systems of governance into the discussion. In this sense, global governance is understood to consist of more than just the formal institutions and organizations designed to manage international affairs (Rosenau 1995: 13). In fact, it recognizes that governance mechanisms can originate at all levels of social, political and economic organization. For example c iv i l society groups may exert control mechanisms on corporations via market mechanisms by staging consumer boycotts or smear campaigns; states may invoke legal mechanisms to govern trade and the movement of capital across borders; international organizations may demand enterprises to conform to international norms; and private firms may seek out voluntary control mechanisms to monitor and regulate environmental harm. Among these various types of governance mechanisms, I have identified two broad paths through which the governance of corporations can occur. First, mechanisms can be initiated through the state sphere of governance, whereby actors in the international system seek to govern the behaviour of corporations via governments and international institutions. This may include using domestic political or legal structures to influence corporate behaviour. 10 For example, the use of the United States Al i en Tort Claims Act ( A T C A ) 3 to hold transnational corporations liable for human rights abuses overseas can be considered an attempt to govern the behaviour of corporations through the state sphere of governance (Shamir 2004). Alternatively, governance in this sphere may include utilizing the formal structures of state-sanctioned international organizations such as the United Nations, World Trade Organizations (WTO) or the European Union. The United Nations Global Compact, where signatory corporations adopt voluntary principles of human rights, labour and environmental standards can also be considered an articulation of the state sphere of governance. Second, governance can be initiated through the market sphere, relying on mechanisms within the global capitalist system of exchange and accumulation to influence the behaviour of non-state actors. In the market sphere, activists can use both formal and informal market mechanisms to shape the behavioural outcomes of corporate actors by influencing the profits or share price of companies, for example through boycotts and divestment campaigns. Similarly, formal regulatory mechanisms of the stock exchange system constitute governance through the market sphere providing rules by which corporations must abide, such as formal annual reporting, disclosure of financial accounts and transparency in corporate management structures. It is on the market sphere of governance that the following discussion wi l l focus, examining how activist campaigns target the profit-making and revenue raising abilities of companies. The aim of these campaigns is to assert the values and goals of corporate social responsibility in order to produce a governing effect on corporate behaviour. 3 The A T C A gives US federal courts jurisdiction over "any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States," and refers to litigation against violators of US and/or international law where crimes are committed outside US territory (Judiciary Act of 1789 cited in Shamir 2004: 638-639). Essentially it gives accusers the ability to sue companies headquartered in the US or listed on the US stock exchange for negligence or criminal acts perpetrated overseas. 11 Violence and Human Rights in the Extractive Industry In the oil industry, concerns about the governance of corporate behaviour have grown out of extensive academic, activist and non-governmental organization (NGO) research and experience which highlight the adverse social, political and economic effects of natural resource extraction. B y providing access to global markets and acting as a go-between for local elites and capitalists in the developed world, corporations may become involved in violence, displacement or environmental degradation in extractive economies to the extent that their presence encourages the exploitation and trade of resources (Cooper 2002). In this sense, international firms can have a catalytic effect, encouraging environmentally damaging resource extraction practices or facilitating violence by bringing civilians into confrontation with state military or rebel groups keen on maintaining control over lucrative resources (Pegg 1999, 2003a). Companies can also become directly involved in conflicts by providing violent regimes with access to export markets, supplying logistical and infrastructural assistance to violent actors, relying on militia or state military for security, or by encouraging state and non-state actors to use force against civilians in order to secure sites for extraction (Forcese 2001: 37). The oi l and gas industry has a particularly bad reputation when it comes to corporate involvement in violence, c ivi l conflict and environmental damage. A scathing review of the oi l , gas and mining industries released by the World Bank in 2003 suggests that there are major environmental, human rights and transparency concerns regarding resource extraction operations in developing countries. The report's recommendations called for a comprehensive re-examination of World Bank support for the extractive industry as well as the Bank's policies on revenue transparency, human rights standards and environmental sustainability. Further, the report prompted the World Bank to reconsider the long-term viability of the o i l industry 12 more generally, a recommendation which highlights serious problems with the current form of oi l industry operations in unstable developing countries (Salim 2003). Concerns raised in the World Bank report and other academic studies on oi l , conflict and economic and social development (Karl 1997; Pegg 1999; Frynas 2005) provide extensive evidence of the negative social, political and environmental outcomes of oil extraction. High profile cases such as Shell in Nigeria, Unocal in Burma and ExxonMobi l in Indonesia provide further empirical backing for accusations of corporate complicity in human rights abuse, environmental degradation and endemic poverty. These and many other firms have faced extensive criticism in the media, have been subject to sabotage of business activities, and have even faced prosecution in domestic courts because of accusations of aiding or contributing to violence and ecological damage around extraction sites. A s a result of these publicized examples, corporate social responsibility has been advanced as a creative response to these criticisms and has become a unique way of governing the behaviour of large transnational oi l firms. Corporate Social Responsibility in the Oil Industry The suggestion that businesses have social responsibilities has a long history with roots in the beliefs of Andrew Carnegie, who argued that businesses were simply stewards or caretakers of public property, holding it in trust for society as a whole (Freeman and Liedtka 1991; Wulfson 2001). This was a controversial view, and certainly not all agreed with Carnegie's principles of stewardship. Critics such as Theodore Levitt warned against corporate social responsibility nearly 50 years ago, suggesting that meddling with the profit motive w i l l bring a shameful "end to capitalism" (Levitt 1958: 46). Similarly, in the 1970s Mil ton Friedman balked at the suggestion that businesses had social responsibilities. Friedman suggested that advocates of social responsibility were "preaching pure and unadulterated 13 socialism," famously arguing that the "social responsibility of business is to increase its profits" (Friedman 1970). Contemporary critics continue to echo Friedman's sentiment, asserting that corporations should remain focused on their profit-seeking ambitions and leave social and environmental planning up to governments and c iv i l society (Henderson 2001). Other critics however, take a different approach choosing to view C S R policies and their capitalistic ambitions as the Trojan horse of the corporate world, progressive in rhetoric but ultimately empty in substance and possibly detrimental in practice. This more critical stance calls for policy-makers to carefully examine some of the underlying issues such as the problematic "crusade" of corporate ethics and the imposition of particular values on unsuspecting stakeholders (Kapstein 2001; Fox 2004). Marina Ottaway (2001) sees corporate social responsibility as the next step in allowing transnational corporations to become the new "reluctant missionaries," spreading the gospel of responsibility and human rights in the same way that charter companies were once sent overseas to civilize the masses. Despite the many criticisms of corporate social responsibility, the concept has gathered momentum in business and policy circles as well as in prominent international organizations such as the United Nations. The contemporary discussion around principles and practices of C S R originated with the corporations themselves who have used it as a bulwark against public condemnation of the environmental and social impacts of business operations. The term has since grown to have different meanings and various implications depending on the context, but generally there are three ways in which the term corporate social responsibility has been used in the literature. First, as already suggested, C S R has been used as a corporate practice through which firms can better manage public criticisms. This conception of C S R is reflected in the writings of many business and management schools that emphasize its usefulness as a public relations tool as well as a cleaver way to enhance brand power and corporate competitiveness 14 (Porter and Kramer 2003). Second, corporate social responsibility has been used as an alternative mechanism to formal government regulations. Under this approach, C S R is a way of regulating corporate conduct without the use of costly legislation and enforcement. For example, Virginia Haufler argues that voluntary industry self-regulation is "a logical response to the ambiguities and uncertainties of the current global system" (Haufler 2001: 3). However, both the management and regulatory incarnations of C S R rely largely on mobilizing the term as a policy, program or vehicle to achieve a desired end. A s a result, neither captures the complexities and tensions within the C S R debate that continue to define and redefine the parameters of corporate responsibility. A third understanding of the term as presented by Blowfield and Frynas (2005) is considered here to be more appropriate. Blowfield and Frynas suggest looking at C S R as an umbrella term used to capture the emergence of certain international expectations of what the social responsibility of business entails. They suggest that corporate social responsibility, as a concept, generally recognizes that a) companies are responsible for their social and environmental impact; b) companies are responsible for those who they do business with (i.e. subsidiaries, supply chains and security forces); and c) businesses must conduct their relationship with society with this in mind (Blowfield and Frynas 2005: 503). When used in this way, corporate social responsibility is neither understood solely as a corporate practice nor as an alternative to more stringent government regulation (although these are both important materializations of the C S R concept), but as a set of general expectations that are increasingly being expressed and advocated at the international level as a means of holding transnational corporations accountable for the adverse social, environmental and political side effects of business operations. Using corporate social responsibility as a concept that outlines general expectations of international business conduct rather than as a 15 corporate practice or policy better reflects the ongoing dynamic interplay between proponents and critics of CSR, and further recognizes that the expectations of CSR are in flux and subject to change. Incorporating the nuances of CSR is important because while there is a general understanding that certain CSR expectations exist, to whom those expectations apply and the way in which they are translated into action, continue to be controversial and contested. A similar point is made by David Sadler (2004), who argues that concepts of CSR and the expectations that it espouses are socially constructed and continually being reconstituted by the interaction of corporations and anti-corporate campaigners. Understanding CSR as a socially constructed and contested concept therefore leaves room for incorporating and examining the inherently political nature of CSR; that is, at any point in time, corporate social responsibility is likely to benefit certain actors to the detriment of others In the oil industry, corporate social responsibility has become a strategy used by companies to mitigate the impact of oil extraction on local communities, and it is used in public relations campaigns to try and insulate firms from bad publicity. In turn, civil society organizations, NGOs and the international community have used the principles and expectations outlined by CSR to hold multinational oil corporations accountable for their actions through various governance mechanisms. While still in the elementary stages of development, expectations of CSR in the oil sector are growing and impacting the policies and behaviour of large multinationals and some small and medium sized firms. For example, triple bottom-line reporting, where companies report annually not only on their financial accounts but also on their social and environmental records, has become a necessary feature of the annual reports of most large western oil firms and it is becoming increasingly more common in some smaller firms as well. CSR reports have also become essential components of any 16 corporate website, for example, the CSR report of the French firm, Total, appears front and center on their home page, and a quick glance at ExxonMobil's website reveals the company's public commitment to corporate citizenship,4 detailing their community investments, employee health initiatives and environmental conservation projects.5 Organizations and institutions such as the Global Reporting Initiative (GRI)6 have also emerged in an attempt to make such reporting increasingly more standardized, however currently there is no accepted universal standard for CSR reporting in the oil industry, nor are there any mechanisms for monitoring compliance with annual CSR reports. In addition to voluntary firm initiatives, voluntary state-based and international initiatives have been formed in the interest of advancing the CSR agenda and providing voluntary regulation often in place of mandatory state regulation. General guidelines for transnational corporations operating overseas are articulated in state-based initiatives such as the International Code of Ethics for Canadian Business and also in international initiatives such as the Organization for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises8 and the UN Global Compact. More recently, the Extractive Industries Transparency Initiative (EITI) has been formed as an attempt by some state officials and non-governmental organizations to monitor the use of oil revenue by encouraging firms 4 Corporate Citizenship is a term that is often used interchangeably with CSR, however many scholars are increasingly distinguish it as a separate term. In the literature, it now often refers to a stronger version of CSR, whereby corporations are more fully socialized into responsibilities side of the rights/responsibilities nexus of citizenship (see Sadler 2004). 5 See ExxonMobil's Corporate Citizenship webpage at http://www.exxon.mobil.com/'Coiporate/Citizenship/Corp citizenship Com foundation.asp and Total's home page at http://www.total.com/en/home page/. 6 The Global Reporting Initiative (GRI) is a voluntary international initiative designed to standardize CSR reporting by developing and disseminating reporting guidelines and standards. For more information see the GRI website at www.globalreporting.org. 7 The International Code of Ethics for Canadian Business is a code of conduct developed by Canadian businesspeople and academic institutions. It resembles the OECD Guidelines for Multinational Corporations and has been endorsed by the Canadian government as a voluntary corporate responsibility mechanism. 8 The OECD Guidelines for Multinational Enterprises provide a set of voluntary recommendations for corporations to adhere to responsible practices in the areas of human rights, the environment, transparency, corruption and disclosure. For more information see http://oecd.Org/about/0.2337.en_2649_34889 1 1 1 1 1.00.html. 17 and state governments to "publish what they pay." The initiative aims for full disclosure of the revenues generated from the extractive industry in an attempt to curb corruption and prevent countries from falling into the downward spiral of violence, poverty and political and social instability (Karl 1997, 1999).9 While critics remain sceptical of C S R ' s legal implications and observable effects on the ground (Simons 2004; Frynas 2005; Newell 2005), C S R and socially responsible investment initiatives have become of increasing concern to activists and academics alike. Socially responsible investment activism has been one way for non-state actors to mobilize the expectations of C S R and influence the business practices of corporations. For the purpose of this paper, SRI activism is used as an analytic tool to observe and explain the impact of the broader expectations of C S R on corporate behaviour. Traditionally it is a strategy that has been used in the United States to steer large pension funds away from investing in harmful industries such as alcohol and tobacco (Kinder and Domini 1997). The concept has more recently been used to target irresponsible business practices overseas, the most notable example being the use of financial divestment as a means to influence the South African regime to repeal institutionalized racism during the apartheid era. The popularity of SRI as a tool of international governance has gained significant momentum in recent years as shareholders have sought to minimize their financial support for environmentally or socially damaging international business practices, placing their money instead in 'green stocks' or participating in socially responsible investment indexes such as the Dow Jones Sustainability Index (DJSI) and the FTSE4Good index. A s the upcoming chapters w i l l highlight, SRI activism has given non-state actors a powerful governance tool for using shareholder power to guide corporate behaviour towards more sustainable and socially responsible behaviour. 9 For more information see the Extractive Industries Transparency Initiative website at http://www.eitransparency.org/. 18 A s a result of activist pressure and the growing popularity of voluntary state-based and international initiatives, academics have suggested that there has been a gradual shift in the expectations of corporate behaviour and that large multinational firms are no longer insulated from the C S R movement (White 2004). Many argue that the C S R campaigning activities of N G O s have resulted in corporate behaviour gradually becoming more compatible with notions of social responsibility and that international expectations have started to create some soft-law obligations that increasingly define the parameters of appropriate business conduct (Dickerson 2002; Detomasi 2002; Sullivan 2003). Some researchers even go as far as identifying a process of C S R norm socialization (Rieth and Zimmer 2004) or a shift in the organizational norms of corporations where C S R increasingly comes to be an integrated part of the daily business routine (Glazebrook 2005), CSR and the Governance of Corporations Although it remains too soon to tell whether N G O s and activists have succeeded in defining C S R norms for transnational firms, at a minimum, expectations o f acceptable corporate behaviour continue to emerge. As suggested above, many academics argue that high profile western companies can no longer practice "business as usual" turning a blind eye to the social and environmental impact of their business activities. Where the academic literature falls short however, is in the lack of theory setting forth the relevance of C S R expectations for large firms from developing countries that move their o i l extraction operations overseas. This gap in the literature poses a particular problem when trying to examine i f and how mechanisms of governance such as SRI activism, may impact the behaviour of these global actors. In particular, the issue of governing such corporations in the extractive sector has taken on a new significance in recent years with the rapid growth of overseas investments made by 19 multinational corporations from large developing countries. The rise of Chinese investment overseas is of primary concern, as domestic economic liberalization since the 1990s has facilitated rapid Chinese corporate expansion overseas, allowing the country to lay claim the largest amount of investment outflow of all developing countries since the early 1990s (see Appendix A ) (Wang, Webber, and Y i n g 2002: 31). In the search for primary commodity inputs, the race to secure valuable resources such as oi l and minerals has expanded from China's traditional investment destinations in Canada, the United States and Australia, to more risky states in Southeast Asia , Latin America and Africa. Large state-owned multinationals have a distinct advantage, as they have more freedom to invest in countries where western firms w i l l not or cannot go because of domestic and international pressure to uphold the values of good corporate citizenship. The western perception of these firms is that they generally operate under significantly lower standards, are considerably less transparent in their business practices and have fewer reservations about doing business with corrupt or violent regimes. The issue is a pressing one, yet due to a lack of academic research on the topic, it remains unclear what the expansion of these firms into the Third World means for C S R and the governance of corporate activity in the oi l industry. Where the C S R literature does investigate non-western developing country firms and their use or application of C S R , the focus is often on firms' domestic impact and responsibility to local constituents. For example, the concept of C S R is being used in East As i a where numerous N G O s have formed a commitment to promoting the C S R agenda in order to encourage better corporate practices in the region. 1 0 Surveys on C S R in As ia reveal that more attention is being paid to issues of corporate governance, corporate ethics and the social impact of business, yet the literature focuses largely on the domestic operations of large Asian firms 1 0 See for example, CSR Asia at www.csr-asia.com. 20 (Chambers et al. 2003; Lines 2004; Welford 2004, 2005; Kimber and Lipton 2005). Similarly, discussions of C S R in India seem to wholly focus on the relevance of the concept for Indian firms operating domestically; there is little discussion of C S R as a concept that applies to Indian firms operating overseas (Newell 2005; Balasubramanian, Kimber, and Siemensma 2005). In a similar vein, academics committed to examining the overseas expansion of developing country corporations also overlook this very important point; generally focusing their research on the conditions and motivations of overseas corporate expansion, its impact on the state and domestic political and economic reform, or on its significance for economic globalization (see Kumar and M c L e o d 1981; L a l l 1983; Dunning and Narula 1996; Zhang 2003a). Researchers examining the specific issue of corporate governance 1 1 in large developing countries, especially the corporate restructuring of large SOEs, tend to be primarily concerned with the legal and economic necessities of corporate reform rather than the governance of corporations more generally (for example see Tenev and Zhang 2002). Virtually no studies have attempted to suggest what the overseas expansion of large Third World oil firms into risky and unstable developing countries may mean for corporate social responsibility and the governance of o i l corporations globally. There are however, three important exceptions. First, Yongjin Zhang (2005) has raised some important general issues about what China's corporate internationalization strategy means for global governance. Zhang points out the real challenges that Chinese corporate expansion poses to the current governance regime, stating that "The fact that China is going global therefore asks four big questions for the future of global governance, namely, global democracy, global prosperity, " For the purpose of this paper, 'corporate governance' refers to the instruments and mechanisms, including contract and legal mechanisms, available to shareholders for exerting influence over corporate managers (Tenev and Zhang 2002). This can be distinguished from my discussion of'the governance of corporations,' which refers more generally to the ability of local and global actors to influence the behaviour of international firms. 21 global stability and viability of custom-made globalization" (Zhang 2005: xiv). Second, Frost and Ho (2005) have recently published an article detailing the extent of Chinese corporate investment in Southeast As ia and discussing the possible implications of this outward investment for corporate social responsibility. Their conclusions however, raise more questions than answers, specifically raising issues about what Chinese corporate expansion may mean for the international sanctions regime and wondering i f pressure can be brought to bear on Chinese corporations to adhere to labour standards and other codes of conduct (Frost and Ho 2005: 165). Their wavering conclusions on the matter suggest more research must be done. Finally, in a forthcoming book chapter, Scott Pegg (2006) specifically addresses the issue of C S R and the governance of large state-owned bottom-feeder corporations essentially arguing that the structure of the international capitalist system facilitates a "geographic division of labour" where bottom-feeding firms can benefit and profit from their invulnerability to C S R pressures. Chapter five w i l l discuss Pegg's argument further, modifying his thesis in order to more specifically examine the role that socially responsible investment activism plays in widening the governance gap between two types of bottom-feeder corporations. Save for these key pieces, the tendency of both the C S R literature and the literature on the transnationalization of developing country firms to overlook the governance angle provides an important opportunity to examine the problems and prospects of using governance tactics such as SRI activism to influence the behaviour of these corporations as they expand their ventures overseas. O f particular interest is the question, to what extent can socially responsible investment be used by activists as a tool for governing the actions of bottom-feeder oil corporations in developing countries? In light of academic research on the social and environmental impact of oil extraction and the incidence of corporate complicity in violence, displacement and ecological damage 22 around extraction sites, these are increasingly important questions to ask particularly as large state-owned corporations emerge as key competitors in the oil industry. In a number of cases, N G O s and c iv i l society groups have used SRI activist campaigns to hold western corporations accountable for their actions overseas through both state and market mechanisms of governance, but there may be substantial limits to the use of these mechanisms on state-owned firms from large developing countries. The cases of Talisman Energy and China National Petroleum Corporation (CNPC) in Sudan are of particular interest. In one case, c ivi l society groups were able to push the company out of Sudan for violating international expectations of good corporate practice, yet similar tactics have had little impact on the operational activities of the other. The implications of this research are potentially wide-reaching, illuminating the positive and negative outcomes of SRI activism in the oi l industry as well as the problems and prospects for governing corporate behaviour in the future. The next chapter presents the case of Talisman Energy in Sudan, demonstrating the governing effect that SRI activists can exert on market-driven western corporations. It highlights both the negative and positive outcomes of SRI campaigning, revealing both the problems and prospects of using SRI activism as a governance tool in the oil industry. 23 CHAPTER THREE: CSR and the Governance of Talisman Energy This chapter examines the investment, operations and eventual withdrawal of Talisman Energy from its oi l extraction project in the Upper Western Ni le region of Sudan. The purpose of the chapter is to demonstrate how c iv i l society organizations successfully used socially responsible investment activism to influence the behaviour of a western bottom-feeder oil firm. The ability of activists to publicize Talisman's dealings in Sudan and place a downward pressure on the company's share price and financial bottom line was ultimately what led to the withdrawal of the company in 2003. For this reason, the case of Talisman can be considered a 'successful' attempt made by activists to govern the overseas behaviour of a multinational corporation. This chapter w i l l argue that Talisman has been pressured by activists to adopt behaviour identified here as upward competitive advantage, whereby the company must embrace more comprehensive and transparent C S R policies in order to compete in the international oi l industry. The outcome has had mixed results. While the campaign was ultimately successful at securing the withdrawal of Talisman and persuading it to adopt better C S R policies, it can also be viewed as a hollow victory, facilitating Talisman's replacement in Sudan by its comparatively less accountable and less transparent state-owned counterparts. The chapter w i l l begin with an introduction to the history of oil extraction, conflict and war in Sudan, followed by an outline of Talisman's investments and operations in the Upper Western Ni le region. I w i l l then highlight the sources of controversy over Talisman's involvement in Sudan, including the accusations of corporate complicity in violence, human rights abuse and environmental degradation. This w i l l be followed by an examination of the company's response to these accusations and the way the company used corporate social responsibility to justify its continued presence in Sudan. Finally I w i l l discuss how activists were able to use the expectations laid out by C S R as a mobilizing force for the SRI campaign, 24 exerting significant shareholder pressure and eventually leading to the company's withdrawal. I w i l l conclude by discussing in what ways the campaign can be viewed as a success, before suggesting that the Talisman case highlights some of the problematic outcomes of SRI activism, which have more significance in light of the rapid internationalization of large state-owned enterprises. Thicker than Blood: Oil and War in Sudan Situated along the Ni le , Sudan occupies a precarious geopolitical space as a bridge between the Arab and Mus l im world of the Middle East and the tribal, Christian and African south. Migration along trading routes in the early 19 t h century brought Islam and Arabic language to Sudan. Traders were successful in converting many northern tribes to various indigenous forms of Islam, however, attempts to socialize the south into the use of Arabic was only successful to the extent that the language was used by southerners for purposes of trade and commerce (Sharkey 2004). The expansion of the slave trade along the Ni le encouraged further Islamization and Arabication in the south, where tribes were viewed as pagan, backward, ungodly and in need of redemption (Khalid 2003: 278; Sharkey 2004). The imposition of Islam and Arab culture on African southerners was motivated by paternalistic assumptions of northern superiority. There was little desire to integrate southern Sudan into the homogenous ethnic Arab identity; southerners that adopted northern cultural characteristics were not considered 'Arab ' because they were not thought of as occupying the same social class as migrants with light Arab skin colour (Sharkey 2004:117). A culture developed whereby the Arabized north ruled over southern Africans, whose indigenous tribes, ascribing to Christianity or African tribal rituals, resented attempts at religious conversion, slavery and subordination. The Sudanese state was deliberately separated into two opposing 25 identities that characterized the master/slave relationship entrenched by Arab traders. The separation of north and south was further exacerbated through divisive policies of British colonial rule which left a legacy that emphasized development in the north while leaving the south largely to its own devices (Khalid 2003: 280). Sudan has since been plagued by conflict and war. The most recent conflict ignited in the early 1980s and until just recently, laid claim to Africa's longest-running c iv i l war, which has seen over 2 mill ion people kil led and 4.5 mill ion people displaced. Since oi l was first discovered by Chevron in 1978 in the southern region of Sudan it has played a major role in ongoing conflict and violence in the south (see Appendix B) . A potentially lucrative discovery, oi l soon became a source of conflict. In 1983 President Nimeir i made a bold move, dissolving southern autonomy and dividing the south into three separate 'regions' that were to be administered by the government based in Khartoum. In redrawing the administrative boundary between the north and the south, Nimeiri purposely created the new boundary to include more of the oi l concession areas in the enlarged northern region (Gagnon and Ryle 2001; H R W 2003: 130). The government's annexation of the oi l territory became major source of contention, with the northern government and southern rebels each laying claim to the oi l riches. The government made it clear that it intended to exploit the 011 resources while continuing to marginalize the tribes in the south, while the southern rebel groups continued to view the oi l as rightfully theirs, proclaiming oi l installations as fair targets for sabotage in their war against the north. A s a result of the war, o i l companies in Sudan struggled to bring oi l production online. In 1984 Chevron suspended its operations due to a rebel attack by southern separatists that 1 2 The northern government and southern rebels signed a peace deal in January 2005 bringing an end to the 21 year civil war. A power-sharing agreement was signed between the north and south in July 2005, and while the agreement has been monumental, peace in the country remains precarious. Violence and conflict in the south around sites of oil extraction and in the western region of Darfur continues. 26 killed three company workers. A small Canadian company, Arakis Energy which took over from Chevron in 1992, faced similar security problems, and financial difficulty eventually forced it to sell 75% of its holdings to three state-owned firms, Sudapet (of Sudan), Petronas (of Malaysia), and China National Petroleum Corporation (CNPC) , forming the Greater Ni le Petroleum Operating Company ( G N P O C ) in 1996. 1 3 The G N P O C was to undertake oi l exploration and extraction operations in Blocks 1, 2, and 4 (see Appendix B) , and in 1997 plans were finalized for the construction of a 1,540 kilometer pipeline designed to transport oi l from the extraction sites in the south to the northern-controlled Port Sudan on the Red Sea (Gagnon and Ryle 2001: 26). B y 1998, the pipeline was under construction, but petroleum production remained negligible at about 12,000 barrels per day and Sudan was still importing most of its energy needs ( M E E D 2004: 29). Despite its best efforts, further financial trouble forced Arakis to concede to a looming takeover, and in October 1998 Arakis sold its stake in the G N P O C to Talisman Energy, Canada's largest independent oi l and gas company. Talisman's decision to invest in Sudan gave the G N P O C a major boost. Talisman brought to the project much needed experience and technical expertise, as well as the financial resources needed to take the G N P O C project the revenue-generating stage (Petroleum Economist 1999; Gagnon, Mackl in , and Simons 2003: 19). Some analysts have even stated that without Talisman's investment, oi l production in Sudan may never have been realized (Nikiforuk 1999). Less than one year after the Arakis takeover the pipeline to the Red Sea was complete, and on M a y 31, 1999 it was officially opened. B y the end of 1999, 100 wells from 6 oi l fields within the G N P O C concession were tied into the pipeline and oi l production from the region had reached 150,000 barrels of oi l per day. Talisman's investment achieved in one year what 1 3 Sudapet held a 5% stake, Petronas held 30%, while CNPC was the largest stakeholder at 40%. The details of CNPC's Sudan operations will be further elaborated in chapter four. 27 Arakis had been attempting to achieve over the previous four years. The investment was a business success, with analysts estimating that annual oi l export revenue would exceed US$500 mill ion per year, forecasting sustained growth in production and export capacity over the next few years (Petroleum Economist 1999). The Controversy Despite its apparent business success, Talisman faced extensive criticisms of its Sudan acquisition. Although activists and N G O s had issued repeat warnings about the political risks and human rights concerns in Sudan, Talisman went ahead with the deal. The Sudan deal and the company's subsequent operations quickly became an ongoing saga in Canadian and international newspapers and industry periodicals. It has been noted that at the time, the company believed that its low profile as an independent Canadian company would ensure its immunity from large protests (Nikiforuk 2000). One journalist even stated that "Talisman could afford to go where better-known oil companies dare not invest because.. .with no downstream assets, Talisman was not vulnerable to petrol station boycotts" (Bowley 1999). While gas-station boycotts were not of concern, accusations of environmental damage and corporate complicity in the Sudanese war subjected Talisman to increasing pressure from activists keen on publicising the company's dealings in Sudan. The Sudan investment was confronted with condemnation from church and anti-slavery activists who protested Talisman's tacit support for the human rights-abusing regime. Critics expressed three interrelated concerns about corporate activity in Sudan. First, activists and N G O s such as the Inter-Church Coalition on Africa ( I C C A F ) that are opposed to corporate investment in Sudan have criticised multinational corporations for creating economic ties with "one of the world's worst human rights abusers" and sponsors of religious persecution, 28 violence and slavery ( I C C A F Press Release cited in H R W 2003: 514). Second, critics have expressed concern about oil extraction operations, arguing that corporate involvement in Sudan's oil sector facilitates the government's ongoing war effort by providing long-term financing for Khartoum, allowing it to expand its military and war activities in the south. Finally, activists have pointed to examples of direct corporate involvement in human rights abuse, displacement and environmental damage and have accused companies of practicing "militarized commerce" (Forcese 2001). Activists involved in the campaign have all expressed concern about the role business plays in exacerbating the war. A t a minimum, all have called for increased surveillance and governance of overseas corporate investment, and many have called for the complete withdrawal of complicit corporate actors. In the campaign against Talisman, these groups have increasingly articulated their concerns using the language and expectations laid out by the emerging corporate social responsibility agenda, which stipulates that global corporations must recognize their social and environmental responsibilities and conduct their operations according to international expectations of business conduct and ethics. Mobil ized by this growing international concept, N G O s , activists and c iv i l society groups sought to govern the actions of Talisman through SRI activism, calling for the company to comply with more stringent codes of conduct or otherwise withdraw. The campaign launched Talisman into the media spotlight and subjected it to one of the largest and most successful SRI campaigns that the oi l industry had ever seen. The Evidence Evidence of human rights abuse and forced migration around the oi l concessions began to accumulate at the advent of oil exploration in the 1970s. Both Chevron and Arakis became 29 embroiled in the c iv i l war between north and south, and both had experienced violent protests and sabotage of oi l installations. Talisman was to suffer the same fate, as activists, government officials, and journalists began to compile evidence of corporate complicity in human rights abuse, forced displacement and environmental damage. The first damning report was issued in October 1999 by Special Rappateur Dr. Leonardo Franco of the United Nations Commission on Human Rights ( U N C H R ) . The report confirmed previous journalist accounts of widespread civilian displacement around the oi l concessions. It stated that in various military attacks, the government killed and displaced civilians using "Antonov bombers, helicopter gunships, tanks and artillery, abducting hundreds and burning over 6,000 homes, with a view to clearing a 100-km swathe of territory around the oilfields" ( U N C H R 1999). The report was damaging, stating that "The economic, political and strategic implications of the oil issue have seriously compounded and exacerbated the conflict and led to a deterioration of the overall situation of human rights and the respect for humanitarian law, as well as further diminishing the already slim chances for peace" ( U N C H R 1999). The report by Franco also revealed that Talisman and the companies of the G N P O C were using government army personnel and militias to provide security for oi l installations, and that revenues generated from oil extraction were being used to fund the war efforts of the northern government. Talisman responded by denying and playing down the findings of the report. Meanwhile pressure was also mounting for the Canadian government, who faced a wel l -organized lobbying effort by activists and church groups as well as strongly worded criticisms from the United States government, which had expressed concern about Sudan's human rights record and suspected links to terrorism. Shortly after the details of the U N report hit the headlines, the Canadian government announced its intention to sponsor its own fact-finding 30 mission to investigate the allegations of corporate complicity in human rights abuse around the G N P O C (Ljunggren 1999). The mission was led by African specialist John Harker and the final report was issued in January 2000. The 106 page 'Harker Report' confirmed the findings of the U N H C R , detailing violence and civilian displacement around the oil concessions. It also found that the Sudanese government was using an airstrip operated by Talisman to arm and re-fuel Antonov bombers and helicopter gunships that frequently ran bombing raids against civilians in the oil region (Harker 2000: 15). The conclusions that Harker came to were extremely critical, stating that "the oi l operations in which a Canadian company is involved add more suffering" (Harker 2000: 15). Follow up reports have confirmed Harker's findings and have documented Talisman's further complicity in the Sudanese conflict. Maina K i a i from Amnesty International reported that civilians living in and around the oi l fields have experienced forced displacement, aerial bombardments, unlawful killings, torture, rape and abduction, and she has accused foreign companies of turning a blind eye to these crimes (Amnesty International 2000). Amnesty International later recommended that Talisman take immediate steps to raise human rights concerns with the government of Sudan, maintain the utmost respect for human rights and provide a guarantee that the company's oi l infrastructure would not be used for military purposes. Talisman agreed to comply, but Amnesty reported a year later that Talisman had failed to implement the recommendations ( H R W 2003: 554). A n independent report commissioned by a number of Canadian organizations 1 4 came to the same conclusions as the Amnesty report, writing in 2001 that Talisman was directly and indirectly assisting the Sudanese government by allowing the "use of oil infrastructure and facilities such as airstrips, roads and vehicles for military purposes" (Gagnon and Ryle 2001: 1 4 These organizations are the Canadian Auto Workers Union, the Steelworkers Humanity Fund, The Simons Foundation, the United Church of Canada, and World Vision Canada. 31 39). This report also highlighted concerns about security arrangements for the G N P O C revealing that " A typical oi l well in Upper Nile has the appearance of a defensive installation" and arguing that corporate payments to the government for the protection of oil installations "blurs the distinction between security provided for oil operations and military operations" (Gagnon and Ryle 2001: 28-29). Finally, an extensively detailed report by Human Rights Watch released in 2003 has further documented corporate complicity in violence against civilians of southern Sudan. It compliments previous reports by presenting the findings of extensive fieldwork in Sudan examining how key corporate actors have contributed to violations of human rights and a continuation of the war ( H R W 2003). Interestingly, the report also presents one of the few accounts of the environmental impacts of oil extraction in Sudan. The report explicitly points out the absence of any comprehensive study examining the impact of oi l extraction on the local environment. O f utmost concern is the impact of upstream oi l projects on the Sudd ('barrier' in Arabic), the world's largest freshwater wetland, which extends across the oil development regions of Blocks 5, 5 A , 5B, and part of Block 4 where the G N P O C is operating. The Sudd is an extremely inhospitable swamp the size of Belgium which conservationists have dubbed "the final refuge for truly free-roaming herds" including elephants, hippopotamus and the rare tiang antelope (Howard and Berger 1990: 40). A s a result of the region's ecological sensitivity, oil development is likely to have major ecological consequences, jeopardizing the habitat of rare plant and animal species while also endangering the livelihoods of local cattle herders. Companies operating there however, have given it little attention ( H R W 2003: 499). Sudanese environmentalists have been warning companies since 1999 about the damage that oil extraction w i l l inflict on the local environment, but Human Rights Watch reports that environmental legislation in Sudan remains 32 vague allowing companies to largely ignore environmental concerns ( H R W 2003: 502). Talisman did carry out an environmental impact assessment for its operations in Sudan, but the assessment only examined the environmental impact of the pipeline route to the north and did not explicitly address upstream projects in the G N P O C concession area ( H R W 2003: 503). N o other impact assessments have since been commissioned to assess the ecological effects of the oi l installations or the consequences of oi l spills or gas flaring. Damage to the area is clearly evident, and aerial photos commissioned in 2000 by Talisman its self (in an attempt to ward off accusations of widespread human displacement), have revealed some of the environmental consequences of oi l extraction in Upper Western Nile . Professional analysis of the photos concluded that the construction of raised roads has disrupted natural water drainage creating visible changes to the floodplain in areas of Talisman's operations ( H R W 2003: 508). Reports on the environmental damage caused by daily oi l extraction operations have yet to be published. The Response Despite multiple reports outlining the ways in which Talisman has been complicit in environmental damage, violence and human rights abuse, the company continued to deny all accusations of wrongdoing. On the charge of overlooking environmental considerations, Talisman responded to the allegations made by Human Rights Watch in 2001 stating that most of the upstream development responsible for ecological damage would have taken place prior to Talisman's entry into the project, thereby clearing the company of any liability. Talisman further stated that it was in the process of recommending an environmental planning standard for the G N P O C , but Human Rights Watch notes that, at the time their report was published, no 33 identifiable steps had been taken to implement more stringent environmental regulations ( H R W 2003: 502-504). On the issue of human rights, Talisman continued to maintain its innocence and justify its presence in Sudan. The company's responses to allegations of complicity in war and violence have taken two forms. First, the company responded in flat-out denial, arguing repeatedly that it was under the impression that no civilians inhabited the region in which operations were being carried out. The company went so far as to take journalists and industry analysts on a tour of the concession area in November 1999 in the hopes of showing them evidence that the area was largely uninhabited prior to oi l development and that forced displacement, in fact, did not take place (Oil & Gas Journal 2000). A s noted above, Talisman also spent C A N $ 150,000 and arranged for aerial photos to be taken of the 49,000 square kilometer concession area to further prove the point. Call ing the accusations of forced displacement "outlandish" and "untrue," C E O Jim Buckee was quoted as saying "I suppose that there is displacement in various parts of Sudan. This [aerial photo evidence], at least, refutes the fact that tens of thousands of people were forced from their homes in our area" (Canadian Press NewsWire 2001). These claims were made despite extensive evidence presented above that unequivocally concludes that in fact, widespread displacement has occurred in the G N P O C concession area. A m i d mounting criticisms from the media, N G O s , activists and state officials, Talisman was forced to alter its position on the matter. The company's later responses to allegations of complicity in human rights abuse attempted to play down previous claims of innocence, rather, emphasizing the argument that Talisman's presence in Sudan was a force for good facilitating "constructive engagement" with the government of Sudan. The company adhered to the belief that engaging with Sudan would bring peace and prosperity initiating a trickle-down effect, 34 opening the country to "new ideas, values, and influences" (Sheppard and Manhas 2000: 70). Company representatives have stated that "Economic development leads to the promise of a better life and can be the catalyst for peace, while isolation has the most harmful impact on the poorest members of society" (Sheppard and Manhas 2000: 70). Falling in line with the classic argument about the benefits of resource extraction, Talisman's argument runs contrary to the evidence presented by scholars, who suggest that oi l production and export leads not to peace and prosperity, but often to corruption, poverty and violence (Karl 1997; Ross 1999; de Soysa 2000, 2002). The Campa ign Activist groups have had an unprecedented influence on Talisman's decision-making and behaviour in Sudan. While protests against Canadian oil investments in Sudan began prior to Talisman's acquisitions, they gathered significant momentum and publicity when Canada's largest independent oil company announced its bid to buy Arakis Energy in 1998. Campaigners were creative in the use of their tactics. In addition to the traditional 'name and shame' tactics intended to draw public attention to corporate behaviour, activists were able to force the Sudan issue onto the agenda of top management through shareholder activism and a well-organized divestment campaign, lobbying shareholders and investment management firms to cut their ties with Talisman. In the end, the quantifiable impact that the campaign had on the company's share price was one of the most important factors in forcing Talisman to sell its stake in Sudan in 2002. The first observable behavioural shift brought on by the campaign was Talisman's re-examination of how it dealt with public criticism and issues of business ethics and corporate responsibility. In 2000, after Talisman had faced the wrath brought on by the reports issued by 35 the U N C H R , John Harker and Amnesty International the company took the initiative to hire the public-relations firm H i l l & Knowlton Inc., as well as create an internal C S R department to coordinate the company's corporate responsibility initiatives. The reorganization took C E O Jim Buckee off the hot-seat, placing the new corporate social responsibility manager, Reg Manhas, in charge of damage-control and C S R initiatives. Talisman launched into a public relations campaign, attempting to convince investors, the media and the Canadian and U S governments that its Sudan operations were legitimate and contributing to economic development in the country. Company-produced industry periodicals argued that Talisman was a positive force in southern Sudan, highlighting the company's commitment to corporate social responsibility 1 5 and social investment (Sheppard and Manhas 2000: 71). The "tangible benefits" of the G N P O C project, according to Manhas and his legal affairs colleague, include the construction of five medical clinics, three schools and new roads, as well as projects that provide electrical power, vaccination programs, better water access, emergency shelter and improved medical treatment (Sheppard and Manhas 2000: 72). The company also published its first C S R report in 2000, which was dedicated to outlining the company's "Sudan Operating Principles" as well as detailing the measures the company was taking to mitigate environmental impact and provide much needed social investment, outlined above. 1 6 The report was a major signal, to critics and campaigners that Talisman was responsive to their concerns, yet it did not satisfy activists, who were determined to hold Talisman accountable for the company's complicity in human rights abuse and violence. Critical analyses of the reports have argued however, that they lack clarity, are vaguely worded, and generally water down any sense of obligation to human rights (Simons 1 5 Talisman defines corporate social responsibility as "business decision-making that considers ethical values with respect for people, communities, and the environment as well as compliance with legal requirements" (Sheppard and Manhas 2000: 71). 1 6 To view the CSR reports see Talisman Energy's Corporate Responsibility website at http: / /www. ta 1 i s m an -energv.com/corporate responsibility/cr report.htm. 36 2004: 108). Investigators have found that, despite the rosy picture painted in the glossy C S R report, Talisman spent less than one percent (CAN$1 million) of corporate revenue on social investment and development projects, and that most of the projects largely benefited civilians in the north and were not accessible to inhabitants of the south (Gagnon, Mackl in , and Simons 2003: 127). A t the annual shareholder meeting in Calgary on M a y 3, 2000, activists confronted Talisman with a string of accusations. The meeting lasted three hours as activists lined up at microphones charging Talisman with aiding Khartoum in its "war of genocide;" one activist stating that "The shares of Talisman Energy have the colour of blood and the stench of death on them" (Kenny 2000; H R W 2003: 553). Activists tabled a shareholder proposal asking Talisman to commission an independent investigation into its compliance with the voluntary ethical business principles laid out in the International Code of Ethics for Canadian Business, which it had adopted in December 1999. The resolution received an unprecedented 27% support, but unfortunately it was not sufficient to adopt the resolution (Gagnon, Mackl in , and Simons 2003). Shareholders agreed instead to commission an internal investigation to be verified by an independent auditor (Kenny 2000; Gagnon, Mackl in , and Simons 2003). Talisman started to feel significant pressure from the smear campaign and from the activities of activists in the US and Canada who had been lobbying large investment funds to off-load their Talisman stock. The Texas Teachers Retirement Fund cut its ties with Talisman, selling its 100,000 shares at the urging of N G O s and activists after the first U N report was published in 1999 (Crow 2000). The California Public Employees' Retirement System (CalPERS) followed suit, and the largest pension fund in the U S , the T I A A - C R F 1 7 sold its stock after the publication of the Harker Report (Nickerson 1999; Canadian H R Reporter 1 7 Teachers Insurance & Annuity Association-College Retirement Fund. 37 2000). Following the events of the 2000 annual meeting, the Ontario Teachers Federation suggested that it would sell its C A N $ 1 8 4 mill ion stake in Talisman i f accusations of human rights abuse proved to be true. In addition, Congressmen and church groups in New Jersey had been exerting significant pressure on the state to divest its 680,000 shares in the Canadian company (Nikiforuk 1999; Crow 2000). 1 8 Talisman, a company previously considered a Canadian prodigy with high performing stocks and a bevy of keen investors, soon began to see the results of accumulated activist, government and shareholder pressure, and the company's good reputation took a plunge. As one journalist noted "many Canadians don't like being associated with governments that drop bombs on schools and churches" (Nikiforuk 2000). The Sudan investment was affecting the company's profits. Over a 5 month period in 1999, Talisman saw its stock drop by 29%, loosing nearly CAN$700 mill ion in value, a loss which exceeded the expected 10% contribution the Sudan operations were to make for the year 2000 (Nikiforuk 1999: 69; M c K i n n o n 2000). Analysts began to speak of the 'Sudan effect' or the 'Sudan discount' on Talisman shares. In March 2000, Canadian Business magazine reported that Talisman's stock was undervalued by approximately $25 per share, and forecasters predicted that Talisman's investment in Sudan would continue to squeeze the company's value for months to come (Nikiforuk 2000; Cattaneo 2000). A n impending decision in the United States in 2001 to implement capital market sanctions on firms operating in Sudan, which would effectively bar any company operating in Sudan from raising funds on U S capital markets, served to further depress Talisman's share price. 1 9 While capital market sanctions were later withdrawn from 1 8 Other large investment funds that withdrew from Talisman due to activist pressure include: the New York City Employment Retirement System and the Vanguard Group (HRW 2003: 648-649). 1 9 The US had already imposed sanctions in 1997 which barred any US citizen from doing business in Sudan. 38 the legislation, the threat of being de-listed from the New York Stock Exchange sent a strong message to the tarnished company, as it dodged a potentially devastating bullet. A s a result of the efforts of activists and N G O s it has been suggested that "Talisman has been stung by one of the largest campaigns ever organized against an oil company" (Canadian Press NewsWire 2001). B y M a y 1, 2001, more than ten major institutional shareholders had complied with the demands of SRI activists and cut their ties with Talisman, divesting shares worth an estimated US$100 mill ion ( H R W 2003: 648). Industry analysts commented that even giving away Talisman's Sudan assets would have served to boost the company's depressed share price (Koch 2003). Therefore, when rumours began to circulate about the sale of Talisman's Sudan operations in September 2001, the value of its stock jumped 6% (Cattaneo 2001a). Yet Talisman held on to the problematic investment, with Jim Buckee maintaining his position, arguing that the company was a positive force in Sudan. The announcement on November 8, 2001 that Talisman was being sued by the Presbyterian Church of Sudan and three unnamed individuals under the United States A l i en Tort Claims Act ( A T C A ) created more controversy for the firm. The plaintiff charged that Talisman was in violation of international law by actively facilitating "ethnic cleansing" and human rights violations in southern Sudan (Cattaneo 2001b). Talisman has disputed the charges, vowing to fight the accusations in court. Finally, in October 2002, after further controversy and criticism at its 2002 annual shareholders meeting, Talisman announced its intention to sell its Sudan assets to the Indian state-owned company, O i l and Natural Gas Corporation Videsh Ltd. ( O N G C Videsh). The sale was finalized in March the following year and Talisman was finally rid of its controversial investment. 39 SRI Activism and the Governance of Talisman Energy Industry analysts have argued that the SRI activist campaign was a critical factor in Talisman's decision to pull out of Sudan (Gavin 2003). In accordance with Rosenau's conception of governance, the Talisman case demonstrates how the pressure of an active and mobilized public was able to influence corporate behaviour in the absence of an established regulatory instrument or political authority, forcing the company to modify its business operations according to the expectations of SRI campaigners. Interestingly, Talisman has become somewhat of a poster child and advocate of C S R and corporate transparency since its near-death experience in Sudan. The company has continued to publish its C S R reports annually, detailing its social investment initiatives, financial payments to state governments and its ongoing commitment to high environmental and human rights standards. Talisman's 2004 C S R report has even been granted " in accordance" status by the Global Reporting Initiative, a designation that signals a high level of reporting, achieved only by companies who demonstrate that they are leaders in their field. Talisman has also become a participant in the United Nations Global Compact, and has continued to engage with the international community on C S R issues by publishing industry articles on its corporate accountability and reporting practices (Manhas 2004). Further, Talisman is one of the few independent oi l companies to participate in the Extractive Industries Transparency Initiative (EITI), an initiative that urges companies in the oil and mining sectors to publish the payments made to governments in an effort to reduce corruption and minimize the adverse social and political effects of oi l extraction and export. A study done by Save the Children ( U K ) that measured the revenue transparency and reporting standards of 25 large oi l and gas companies (including Shell, B P , Exxon, Total, and C N P C ) ranked Talisman as number one in its overall transparency (Save the Children 2005). Talisman 40 scored nearly 25% higher than the next best corporation in overall revenue transparency, disclosure and anti-corruption practices, a score that was above and beyond those of so-called "world leaders" in C S R such as Shell and B P (Pegg 2006). The report suggests that Talisman's clear lead over the other companies "shows that better practice is possible" (Save the Children 2005: 16). The outcome of the Save the Children report and of Talisman's increased involvement in C S R initiatives demonstrates an interesting dynamic of upwardly mobile C S R behaviour, where the company has become increasingly engaged in corporate social reporting and corporate transparency initiatives in order to out-compete its rivals. This observable upward competitive advantage is the result of cleaver SRI campaigning by human rights activists and N G O s which provide "push" factors for corporations that lag behind accepted standards of conduct, encouraging them to incorporate international expectations of C S R into their business practices (Winston 2002: 85). Previously considered a bottom-feeder in its overseas acquisitions and operational practices, Talisman has become a world-leader almost overnight, displaying added commitment to principles of sustainability, human rights and transparency. While successfully persuaded by activists to incorporate these ethical requirements into their business practices, the company's upward move cannot be considered to be purely altruistic. Ultimately it serves to boost the company's ethical appeal and competitive edge. A growing literature on the "business case for C S R " suggests that C S R is simply another corporate tool for increasing competitive advantage: companies with more sustainable and ethical business practices w i l l reap the financial benefits of the socially responsible investment movement, w i l l attract more capital and better employees, wi l l enhance brand power and reputation, and wi l l be able to outbid other companies for certain types of contracts (Porter and Kramer 2003; Prahalad and Hammond 2003). Indeed there are indications that Talisman has 41 benefited from its proclaimed ethical enlightenment. Some investors have expressed excitement about the post-Sudan potential of Talisman, arguing that the undervalued share price of the company makes it a lucrative investment (Koch 2003). C E O Jim Buckee also stated in June 2003 that the high profile Sudan dispute has opened doors for the company in places like Qatar and the United States, and analysts report that the Sudan debacle scored points with shareholders: the company's withdrawal from Sudan demonstrating its responsiveness to investor concerns (Cattaneo 2003). Regardless of the corporate benefits, it is clear in the case of Talisman that SRI campaigners can claim a victory. In this case the SRI campaign triggered an upwardly mobile response, with the company taking observable steps to incorporate international C S R expectations into its business operations and management strategies. This positive outcome is important to highlight. It suggests first, that SRI campaign tactics can be successful at influencing corporate behaviour and second, that the resulting behaviour may lead to increased transparency and accountability practices. The successful outcome of the Talisman campaign however, has come at a price. Some journalists and N G O s have declared a "hollow victory," pointing to the fact that Talisman's withdrawal does not mean an end to oi l production in Sudan, but rather it allows oil exploration and production to fall into the hands of less governable state-owned oil corporations from India, China and Malaysia (Energy Compass 2002; Petroleum Economist 2005). The case of Talisman therefore, calls into question the utility of using SRI campaign tactics, which focus on governing corporations by disrupting financial performance and influencing their share price rather than socializing firms into more ethical and sustainable practices. This is not a particularly new argument, and it returns to the issue of governing corporations through the "business case for C S R , " where companies only adopt more transparent and responsible 42 practices when they can benefit from it financially. This remains to be a problem for critics who seek to more fully integrate C S R into the philosophy and culture of large transnational corporations. Yet, it is my assertion that governing corporations through SRI campaigning is important to examine as a growing area of political activism where non-state actors can exert significant influence on large transnational firms. Further, the prospects of using SRI activism as a tool in this way gains increased significance in light of the growing presence of Third World firms which are comparatively less-transparent, less-accountable, and which may actually pose a threat to the governing effects of the C S R socialization process that some critics speak of. The Talisman campaign, which saw a western firm replaced by less-accountable non-western corporations, raises important questions about the ability of the international community to govern the actions of these new global actors. Can state-owned oil companies be governed by the international community and the expectations of corporate social responsibility in the same way that Talisman was? If not, why do current SRI governance mechanisms fail to influence these new actors in the oi l industry? A n d what might be the implications of this for the future governance of corporations? The next chapter w i l l answer some of these questions by presenting the case of China National Petroleum Corporation in Sudan. It w i l l highlight the ways in which SRI campaigners have sought to influence the behaviour of the large state-owned firm, exploring the problems and prospects of using SRI activism to govern its overseas behaviour. 43 CHAPTER FOUR: CSR and the Governance of CNPC This chapter looks at the controversy surrounding the investment and operations of China National Petroleum Corporation ( C N P C ) in Sudan. The case of C N P C serves to contrast the previous chapter by examining the outcomes of the SRI campaign which aimed to restrict the revenue-raising abilities of the large state-owned firm. C N P C ' s quasi-state status enables it to avoid SRI governance tactics, operating as both a state and market entity without being wholly influenced by either system of governance. The inability of SRI activists to place significant pressure on the company's financial bottom line and the failure of international actors to reign in the company's actions has resulted in C N P C ' s relative isolation from SRI campaigning tactics. This chapter posits two arguments. First, I elaborate on an argument made by Scott Pegg (2006), suggesting that C N P C is able to use its invulnerability to SRI activism to gain a competitive edge and enhance its position in the bottom-feeder oi l market. To this end, C N P C benefits from a downward competitive advantage, where increased transparency and responsibility requirements that constrain its western rivals means that C N P C can better compete in the niche market of oi l extraction in risky and unstable developing countries. Second, I argue that despite these governance failures, the campaign that targeted C N P C and its partially-owned subsidiary PetroChina, has played an important role in raising related governance and human rights issues with key political and financial decision-makers. This small success has created a greater space for exerting civi l society influence on large corporations from the Third World and has provided non-state actors with a powerful tool for wielding market-based mechanisms of governance. The chapter w i l l begin by outlining the context of China's corporate internationalization strategy and the growing significance of Chinese overseas oi l investments. 44 This w i l l be followed by a short profile of C N P C , its corporate structure and its operations in Sudan. I w i l l then draw on the material presented in chapter three to outline the controversy surrounding Chinese oil investments in Sudan, which mirror the concerns activists have expressed regarding Talisman's role in violence, displacement and human rights abuse. Finally I w i l l examine the events and outcomes of the SRI campaign directed at the 1999 New York Stock Exchange listing of C N P C ' s newly created subsidiary, PetroChina. I w i l l conclude by suggesting that the PetroChina campaign provides significant insight into the small successes of SRI activism, while also highlighting the ultimate challenge that activists face in governing the investment behaviour of large quasi-state corporate entities. The 'Go Out' Strategy and Chinese Oil Investment Overseas China was a late-starter in developing its domestic corporate capacity, and its policy framework lags behind many of the other large developing states which began to engage in significant overseas investments in the late 1970s and 1980s (Lall 1983). Therefore, when economic restructuring and reorganization was initiated in the 1970s by the Chinese government, it was done with the explicit goal of 'catching up,' creating large state-owned corporations designed to compete on a level playing field with the world's most globalized and competitive transnational firms (Nolan 2001: 27). Chinese policy on overseas corporate expansion can be traced back to 1979 when the government first published a document presenting overseas direct investment (ODI) as one of thirteen official policies directed at opening and expanding the Chinese economy. This set the stage for consolidation, expansion and restructuring of the country's state-owned enterprise system which became a key component of China's strategy to promote greater economic openness (Zhang 2003a: 54). 45 In the early years of Chinese overseas expansion, import/export conglomerates and natural resource firms dominated Chinese outward investment. Official endorsement of Chinese corporate expansion in 1992 set more extensive reforms in motion and policy reforms, tax incentives and subsidies were introduced in an attempt to encourage more overseas investment in strategic sectors (Zhang 2003a: 72). B y the mid 1990s, ODI approval procedures had been decentralized, corporations were granted 'personhood' status in accordance to modern corporate practice, and assets were slowly transferred from the state to individuals and state-owned holding companies (Wang, Webber, and Y i n g 2002: 47-48). In 2001, the government initiated a new 'go out' policy to compliment the regulatory reforms of the previous 20 years. This new national strategy urged Chinese firms to go out in search of new technology, expertise and raw materials to feed the country's booming economy. Accordingly, analysts now suggest that Chinese companies have "realized a quantum leap in embracing economic internationalization and in creatively responding to globalization," and they have become an increasingly powerful force in the international economy (Zhang 2003a: 79). Between 1990 and 2000 China's O D I as a percentage of gross domestic product (GDP) doubled, and by 2004 total Chinese outward direct investment stock was valued at US$38.8 bil l ion (see Appendix A ) ( U N C T A D 2005b). Fortune Magazine listed 16 Chinese companies in the 2004 Global 500 list of successful companies, a significant increase from just three Chinese companies on the list in 1995 (Guyon 2005). Policy analysts and academics have taken notice of this rapid increase in Chinese outward investment, recognizing that Chinese firms have set a new agenda of "going global" (Zhang 2005; Asia-Pacific Foundation 2005; Frost and Ho 2005). The accelerating rise in Chinese ODI has also raised some eyebrows, with a handful of academics now questioning what China's outward corporate expansion means for 46 corporate social responsibility, global governance and the future of global economic decision-making (Zhang 2005; Frost and Ho 2005). Reforms to the Chinese corporate regulatory apparatus have thus been monumental, as irreversible changes have been made to the way China does business with the world. In particular, the participation of Chinese state-owned firms in the overseas resource extraction market has been a key component of the new internationalization strategy. The primary product industries of industrialized countries were attractive investments during China's early experimentation with its corporate internationalization strategy, largely because projects in these countries provided Chinese corporations with much needed technical expertise and international operating experience (Zhang 2003a: 106). Between 1979 and 1992, 68% of Chinese outward investment went to industrialized countries, and Chinese companies have been quite successful in operating large oi l , mining and other resource extraction operations in industrialized countries such as Canada, Australia and the United States, which have traditionally dominated the Chinese O D I portfolio (Zhang and Van Den Bulcke 1996). However, preferences for these safe investments have been slowly changing over the past decade. A s the Chinese demand for raw materials such as oi l , steel, copper and coal have increased with economic growth, Chinese natural resource acquisitions have also moved into the resource sectors of Africa, South America, Southeast Asia , and the Middle East. As ia continues to be the largest recipient of Chinese investment, followed by North America and Africa respectively (Davies 2004). Demand for oi l specifically, has driven Chinese corporate expansion into new frontiers, and China's state-owned companies have been at the forefront of seeking out upstream investment opportunities outside of their traditional North American and Australian markets. Xinhua, China's news agency, reports that China has participated in 58 overseas oi l and gas projects which exceeded US$6 bill ion in 2003 (Xinhua News Agency 47 2004). Since 1997, Chinese oi l corporations have commenced production projects in Sudan, Kazakhstan, Indonesia, Peru and Angola, and oi l exploration agreements have recently been signed in Chad, Saudi Arabia, Cuba, Morocco, Egypt and Gabon. A recent Chinese government-issued survey identified Africa and Southeast As ia as the top priorities for future O D I by Chinese corporations (Wang, Webber, and Y i n g 2002: 41). The Middle East is the region with the most Chinese oi l investment projects, but the Economist recently reported that China w i l l l ikely become one of the top three investors in Africa within the next few years due to heavy investing in oil and mineral exploration (The Economist 2004). With oi l consumption expected to grow exponentially in China for the foreseeable future, acquiring new oil and gas assets to feed growing demand has become a major goal of the overseas oi l investments of Chinese state-owned firms. Leading the charge into developing economies is China National Petroleum Corporation, China's oldest and largest upstream oi l and gas company, which has made the acquisition of overseas oi l and gas assets the focus of its internationalization strategy. China National Petroleum Corporation The roots of C N P C trace back to China's Petroleum Industry Ministry (PIM) which was disbanded in 1988 as a part of the country's economic restructuring process. When reforms were undertaken, the assets of the P I M were transferred to C N P C which became a government holding company with formal ownership rights, responsible for domestic oi l and gas operations. During the late 1980s and early 1990s the company remained a closely held instrument of the state and was responsible for performing many of the ministerial functions previously held by the P I M (Nolan 2001: 436). Incremental reforms through the 1990s granted C N P C greater autonomy from the central government, and in 1994 the corporation was given 48 the rights to retain profits, and individual production enterprises within C N P C were incorporated allowing them to act as legal persons, sign contracts and hold increased operational responsibilities (Nolan 2001: 437). Finally shedding its ministerial functions in 1998, C N P C became a truly integrated company formally removed from ministerial responsibilities and day-to-day state functions. Despite the company's formal separation from the state, the nature of C N P C ' s relationship with the Chinese government remains ambiguous. Research by Peter Nolan suggests that C N P C continues to be financially tied to the state and that budget allocations from the government are a crucial source of revenue, although Nolan notes that individual production enterprises within C N P C appear to draw up their own budgets and control a large percentage of their profits (Nolan 2001: 439). What is clear is that the overseas expansion of C N P C serves a quasi-state function in securing oi l supplies for China's growing economy, and political motivations play a significant role in the company's overseas decision-making. Nolan suggests however, that while ties to the state are crucial to C N P C ' s success, increased operational autonomy within the individual production units is evident, and the company's move overseas is consistent with the commercial behaviour of established oi l majors who internationalize their operations in order to diversify their investments (Nolan 2001: 440-441). C N P C has been articulate in its vision to break out of its role as a domestic producer and distributor, and it has expressed its intention to advance from its centrally-controlled management structure and embrace "guidance by market forces" in order build a globally competitive firm able to compete in the international oi l market ( C N P C 2005). In many ways the company has made its mark in the global market place. In 2004, C N P C ranked number 46 overall in Fortune Magazine's Global 500, and it came in at number 18 when ranked according 49 to profits, and number two when ranked according to number of employees (Fortune 2005; Fortune (Europe) 2005). C N P C ' s entry into the global oil market however, has come at a difficult time. The last two decades have seen a major reorganization of the international oil industry as oil majors such as Exxon, B P and Shell have focused their efforts on increasing their competitive edge by developing better exploration and extraction technologies, integrating and reorganizing their corporate structures, and pursuing large mergers and acquisitions. These changes to the international oi l industry have all been initiated in response to recent changes in oil prices, production costs and consumer demands (Nolan 2001: 411-414). Reforms to China's S O E system and to its domestic oi l industry in the 1980s and 1990s have attempted to respond to these new challenges by integrating upstream and downstream 2 0 production units in the effort to produce centrally-controlled, integrated and competitive global firms (Nolan 2001: 883). However, Chinese state-owned corporations face significant obstacles to achieving their global level playing field, as the restructuring in the international industry has provided established oil majors with the advantages of economies of scale, operational integration, large market share and established global brand power (Nolan 2001: 421). Despite these challenges, C N P C ' s global vision is slowly being realized through its growing overseas investment portfolio. The very first overseas acquisition made by C N P C was in Thailand in 1993. It later made acquisitions in Canada, Peru and Indonesia, but Sudan, by far, has been the company's biggest success. The company first entered Sudan in 1995, initiated by an aid agreement between Beijing and Khartoum, C N P C later signed a production contract with the Sudanese government to undertake joint oil operations in Block 6 located northwest of what is now the Greater Ni le Petroleum Operating Company concession area (Wu 2 0 In the oil industry, 'upstream' refers to oil extraction activities, and 'downstream' refers to petroleum production and refining activities. 50 and Han 2005: 19). In 1996 the company acquired a 40% stake in the G N P O C , the single largest stake in the project, and it has since become involved in all aspects of oi l exploration, production and construction in Sudan. The G N P O C project initiated C N P C ' s successful move into overseas oil projects, and oi l production in the G N P O C is currently recorded at approximately 300,000 barrels of oi l per day (Wu and Han 2005: 19). Block 6, of which C N P C has a 92% equity share, came online in 2004 and the construction of a 730 kilometer pipeline connecting Block 6 to the Khartoum refinery in the north has just recently been completed. O i l production in Block 6 is estimated to be between 40,000 and 60,000 barrels per day and is expected to increase significantly over the next few years (APS Review 2004; M E E D 2004; W u and Han 2005: 19). C N P C also expects its operations in the Melut basin, in Blocks 3 and 7, to begin producing oi l in 2005, and contracts have now been awarded for the construction of a 1,400 kilometer pipeline from these oi l concessions to a new export facility located near the existing oil terminal at Port Sudan ( M E E D 2004; A P S Review 2004). Sudan is the only investment outside of China where C N P C is engaged in the entire range of upstream and downstream production, including refining, chemicals, marketing, storage, transportation and engineering services ( C N P C 2004). In total, C N P C is responsible for 280,000 barrels per day of oi l production in Sudan (Wu and Han 2005: 19). Operations in Sudan account for nearly half of C N P C ' s overseas oi l production, and Sudan supplies approximately 10% of China's total crude oi l imports (Steil 2005: 53; W u and Han 2005). Sudan is almost wholly reliant on China for the sale of crude oi l , and currently 85% of Sudan's daily oil production is exported to China via C N P C (Steil 2005). A s a result,' C N P C ' s impact and influence on the country has been staggering, and the company's operations there have raised many questions about the ethical business practices of the state-owned firm. 51 The Controversy Journalist Peter Goodman has eloquently summarized the nature of C N P C ' s involvement in Sudan: On this parched and dusty African plain, China's largest energy company is pumping crude oil, sending it 1,600 kilometres upcountry through a Chinese-made pipeline to the Red Sea, where tankers wait to ferry it to China's industrial cities. Chinese labourers based in a camp of prefabricated sheds work the wells and lay highways across the flats to make way for heavy machinery (Goodman 2005). A s highlighted by Goodman, C N P C ' s impact on Sudan is staggering and the influence of the large Chinese company is far-reaching. The close ties between C N P C and Khartoum have therefore subjected the company to immense criticisms from activists who accuse C N P C of being complicit in the northern government's campaign to displace southern Sudanese from the oi l fields. Similar to their attack of Talisman, activists argue that the C N P C fuels, facilitates, and benefits from the Sudanese war and the resulting instability it creates. Indirectly the company has facilitated war and oppression by providing Khartoum with valuable economic and diplomatic ties. In addition, profits from the export of oi l have provided both the financing and motivation for the continuation of war and forced displacement in the south. C N P C has also been directly involved in violence through its oi l extraction operations, and the company is implicated in the human rights abuse, forced displacement, military bombardment and environmental degradation that has been outlined by the U N C H R report, the Harker Report, the investigations of Amnesty International, and the evidence presented by Human Rights Watch. Specifically, C N P C (along with Talisman and Petronas), is directly responsible for the government's military use of oi l infrastructure such as airstrips, roads and bridges, which the Harker Report concluded "enabled [armoured personnel carriers] to reach their destinations more easily than before" (Harker 2000: 48). 52 In addition to the criticisms highlighted in chapter three, C N P C ' s operations have brought added suffering and violence around oil infrastructure, and the company has failed to provide any tangible benefits for local Sudanese. Critics have protested that the Chinese "give little and take much," providing little localized economic benefit in importing all of the necessary goods from China, including labourers and building materials (Walsh 2005). A s journalist Declan Walsh writes " i f the oil is African, the money and management are Chinese. Inside the refinery gates, Chinese engineers man the distillation towers, Chinese cooks serve rice and noodles in the canteen, and workers pedal between the giant oil drums on bicycles imported from Beijing" (Walsh 2005). C N P C has been a major player in all aspects of o i l exploration and production in Sudan, reaping the benefits of large oi l and gas construction projects in the country. The pipeline leading from the G N P O C concession area to Port Sudan was built by the wholly-owned construction division of C N P C , China Petroleum Engineering and Construction Corporation ( C P E C C ) . The company cut corners during construction, and reportedly brought in a team of 10,000 Chinese workers who could "work 13 to 14 hours a day for very little" in order to complete the pipeline on time for the 10 t h anniversary of the 1989 military-Islamist coup (Johnson 1999). The same construction group was also granted the contract for the construction of the oil refinery outside Khartoum as well as a new oi l tanker terminal at Port Sudan. C P E C C was also hired by the Swedish firm Lundin for various infrastructure projects in Block 5 A to the south of the G N P O C , which sparked controversy when, despite warnings about the potential repercussions, C P E C C insisted on recruiting labourers from the north; when 2 1 As and interesting aside, rumours had circulated that the Chinese may have brought prisoners into Sudan to lower the cost of labour for the pipeline project, but no clear evidence of this has yet been uncovered and researchers have noted that it is an unlikely scenario (HRW 2003: 610). 53 locals complained bitterly about the lack of work for southern Sudanese the contractor finally conceded and hired locally ( H R W 2003: 611). The negative repercussions of imported Chinese labour and the isolating nature of Chinese business practices in Sudan have been compounded by C N P C ' s security arrangements around oi l infrastructure in the south, which is provided largely by the Sudanese military. Army personnel were responsible for patrolling the pipeline route during its construction, and the military has continued to watch carefully over Chinese labourers who work the oil wells (Johnson 1999). Security around the oil fields is a salient issue for both sides of the Sudan dispute. Attacks on personnel and oi l infrastructure from rebel groups attempting to oppose the northern government and disrupt oi l production are a constant threat in many of the areas that C N P C operates, and Chinese labourers and engineers have been targets of abduction and violence on numerous occasions ( H R W 2003: 253-254). Northern military presence in southern strong-holds has been essential to the government's control over the oilfields, but their presence is contested by southern oppositionists who view the oil as rightfully theirs. Mili tary presence in the oi l producing areas has facilitated conflict with local populations. Ryle and Gangnon report that oi l rigs in the riskiest areas of Block 4, where C N P C operates, employ as many as 400 Sudanese army personnel to keep guard, and that such personnel are often directly involved in violence and displacement around oil extraction sites (Gagnon and Ryle 2001: 29). Chinese workers have also been directly involved in human rights abuses and, reportedly, have participated in the rape and forced displacement of civilians during the construction of the pipeline (Amnesty International 2000). Civilians from the south report that Chinese labourers armed with machine guns were more than wil l ing to use violence against locals that opposed pipeline construction or refused to leave oi l extraction areas (Amnesty International 2000). 54 Finally, activists and N G O s argue that revenue generated from oi l extraction and export has allowed the northern government to increase its purchase of weapons and military equipment, aiding its violent campaign against the south. Not surprisingly, Sudan's largest weapons supplier is China. The list of the country's weapons procurement since 1995 includes Chinese-made ammunition, guns and tanks, as well as more than 40 fighter jets and dozens of attack helicopters ( H R W 2003: 606; Rice 2004). Numerous reports indicate that from 1999, when the first barrels of oi l were exported, to 2002, military spending in Sudan doubled, and 60-80% of oi l revenue has been spent on weapons and military equipment ( H R W 2003: 464-465; Goodman 2005). In addition, Khartoum's new-found oil wealth has facilitated the creation of a domestic arms industry. With Chinese assistance, Sudan has built three weapons factories outside of Khartoum capable of producing rocket-propelled grenades, machine-guns, and mortars (Gagnon and Ryle 2001: 4; Goodman 2005). The Sudanese government has stated that the domestic weapons industry has become self-sufficient thanks to the "unprecedented economic boom, particularly in the field of oil exploration and exportation" and that the industry w i l l soon be capable of manufacturing larger items such as tanks, heavy artillery, war planes and rockets (quoted in H R W 2003: 469-470). C N P C ' s business deals with Khartoum have provided unwavering support for the northern regime, as a billboard outside the Khartoum refinery aptly notes, " C N P C - your close friend and faithful partner" (Walsh 2005). Now, revealing details of the Sudanese government's violent campaign against non-Arab Mus l im tribes in Sudan's western province of Darfur have only fuelled the fire, spurring further protests from activists who charge C N P C of supporting the 'genocidal' actions of the northern regime in Darfur. Money, oil and weapons that have been granted, produced and manufactured by the Chinese facilitate human rights abuse both in the south and west of the troubled country, yet the international 55 community's ability to govern the actions of the company has been limited. C S R campaigners however have found novel ways to try and influence the behaviour of the large state-owned firm, by targeting its initial public offering on the New York Stock Exchange. The Campaign A m i d mounting criticisms of its ongoing operations in Sudan C N P C announced in A p r i l 1999 that it was to attempt what no other corporation in history had done: raise US$10 bil l ion through an initial public offering (IPO) on the New York Stock Exchange ( N Y S E ) . The listing would be made by the newly formed subsidiary, PetroChina, which was 90% owned by C N P C . The PetroChina IPO was to be the largest offering made by any company, domestic or foreign, in N Y S E history (Robinson 2001). The news sent shock waves through activist networks, labour organizations and the United States government. The public and government outcry stemmed not from the fact that PetroChina was a Chinese company, as nine Chinese companies had successfully listed on the N Y S E since the 1980s. Concerns stemmed from the fact that first, PetroChina was very closely tied to an "old economy" state-owned corporation, and second, because its parent company was heavily invested in Sudan, where issues of human rights abuse, religious persecution and suspected links to terrorism were already well-known (Social Funds 2000; Robinson 2001). For C N P C , the IPO was seen as an efficient and lucrative way to raise large amounts of capital to supplement its cash-strapped budget and also as a way to test the waters of the N Y S E before further embracing the western stock exchange system. The C N P C experiment provided a good opportunity to smooth the way for other state corporations planning to list the following 56 year (Penhoet 2000: 12). Originally, managers intended to list C N P C in its entirety, but re-thought that move in light of the ongoing campaign against Talisman and the mounting pressure from human rights groups who vocally opposed the IPO (Diamond 2003: 67). Investment bankers therefore crafted the new subsidiary, PetroChina, with an eye to the potential points of controversy, incorporating only the most attractive and profitable operations of C N P C in the hopes of minimizing investor's reservations (Penhoet 2000: 13). Human Rights Watch reports that PetroChina was created just days after demands were made by the U S Commission on International Religious Freedom in November 1999 asking the U S Treasury to stop C N P C from issuing shares on the N Y S E ( H R W 2003: 614). The PetroChina spin-off attempted to appease wary investors by erecting a "firewall." The corporate slight-of-hand reorganized C N P C ' s assets, placing domestic operations under the management of the new subsidiary, and ensured that overseas operations, including those involved in Sudan, remained wholly under the management of the parent company. However activists called their bluff. Commissioner Roger Robinson testified before the US-China Security Review Commission about a concerning trend where capital markets are increasingly replacing commercial banks, governments and international lending bodies as the preferred vehicle for so-called "bad actors" such as C N P C to access large amounts of capital (Robinson 2001). He pointed out that funds derived from the stocks and bonds market come with no strings attached; no questions are asked as to where and what the money wi l l be used for, making them a logical target by companies that face international borrowing restrictions for reasons of high political, social or environmental risks. Ultimately it was these risks that sparked controversy in the government, labour and N G O communities, bringing together a range of actors with a common interest in blocking the company's N Y S E listing. The IPO 2 2 Other companies planning to list on the N Y S E included China National Offshore Oil Corporation (CNOOC), China National Petrochemical Corporation, and Baosteel. 57 garnered the attention of both conservative and liberal members of Congress in the U S who expressed their objections in terms of the 'China threat,' Sudan's suspected links to terrorism, or C N P C ' s complicity in the ongoing human rights violations of the Khartoum regime (Steil 2005: 53). A coalition of anti-slavery activists, N G O s , labour organizations, environmental groups and human rights activists opposed the N Y S E listing because it would allow C N P C , one of the main facilitators of violence and ongoing human rights abuse in Sudan, to raise billions of dollars on U S capital markets. 2 3 SRI activists played a pivotal role in raising awareness in the pension plan, mutual fund, and business communities, forcing C N P C to re-evaluate its foray in the U S capital markets. The issue of Sudan was the common rallying point for the broad coalition. Freedom House's Center for Religious Freedom took action by issuing urgent letters to more than 200 pension funds asking them not to support the PetroChina IPO, arguing that funds raised in the offering would go to C N P C ' s Sudan investment, facilitating the ongoing persecution of Christians in southern Sudan (Hiebert 2000: 57; Freedom House 2000). Friends of the Earth protested the IPO on the basis of inadequate registration documentation, calling for lawmakers to postpone a decision on the IPO, and the American Anti-Slavery Group similarly announced a divestment campaign, calling PetroChina shares "slave stock" and publicly shaming potential investors (Social Funds 2000). Key U S lawmakers also participated in the protest, writing to the U S Securities and Exchange Commission (SEC) in 1999 asking them to delay the IPO pending a more thorough review of PetroChina's operations and ambiguous corporate structure (Hiebert 2000: 57; H R W 2003: 612). " Some campaigners also protested the CNPC listing because of the Chinese government's activities and environmental record in Tibet, as well as the company's plans to layoff thousands of Chinese workers in the name of corporate restructuring. These issues will not be discussed here, as the bulk of written material highlights the Sudan issue as the main driver of N G O and activist objections. 58 Spearheaded by the powerful American Federation of Labour and Congress of Industrial Organizations ( A F L - C I O ) , 2 4 U S labour organizations joined the fray in March 2000. Labour groups sent memos to the top 100 investment management firms in the United States highlighting the financial risk posed by PetroChina's governance structure, employee layoff intentions and the ethical issues surrounding C N P C ' s involvement in Sudan ( A F L - C I O 2000). The labour heavy-weight was a powerful ally for human rights activists. With 9 mil l ion members and US$430 bill ion invested in foreign equities through its pension funds, the A F L -CIO's criticisms of the PetroChina IPO caught the attention of some of the largest pension plan managers in the U S ( A F L - C I O 2000). The SRI protests stirred up an enormous amount of controversy creating a public-relations nightmare for PetroChina (Hiebert 2000: 56). Activist groups were able to garner the support or sympathy of almost every major human rights group and over 200 mainstream and fringe N G O s producing a coalition representing nearly 20 mil l ion people (Gopinath 2000; Robinson 2001). Participants called the campaign "a fusion of human rights and shareholder activism," lauding it as "the first time a public interest coalition so effectively campaigned on a single issue" (Gopinath 2000). It was an exceptional event which potentially put billions of dollars at stake (Diamond 2003: 69). The IPO campaign had dire consequences for PetroChina. Among the investors that chose to steer clear of PetroChina was the T I A A - C R E F , the world's largest pension fund, and the California Public Employees' Retirement System (CalPERS) (Hiebert 2000: 56). Both expressed concern about the risks that investing in PetroChina would bring. Through the pre-emptive divestment campaign, SRI activists managed to deflate the initial bid of US$10 bil l ion 2 4 The AFL-CIO is a voluntary association of 53 national and international unions representing more than 9 million workers. The mission of the AFL-CIO is "to bring economic justice to the workplace and social justice to our nation." See the AFL-CIO website at http://www.aflcio.org/. 59 by 71%, and on Apr i l 6, 2000 PetroChina emerged from the IPO raising a mere US$2.89 billion. A New York Times headline reported, "China's no. 1 oil company goes public with a whimper" (Landler 2000). O f the amount raised more than a third of the capital was contributed by a small number of investment companies located in Hong Kong (Penhoet 2000: 12). B P Amoco was the other large investor, contributing an estimated US$576 mil l ion to the PetroChina IPO in the final hour, in exchange for a joint venture contract in eastern China (Hiebert 2000: 58). Analysts state that B P Amoco was a pivotal player and saved the IPO from utter failure, however the company's life-saving move was not made without suffering significant consequences, as it later became the target of gas station boycotts organized by SRI activists (Robinson 2001). C N P C ' s response to criticisms and activist concerns has, as expected, attempted to justify the company's investments in Sudan. The Chinese have been quick to justify their operations in Sudan by arguing that China's Sudan investments are simply a manifestation of China's desire to compete in the global market alongside other more established corporations. The Chinese deputy foreign minister has been quoted as stating that China tries "to separate business from politics" in its pursuit of good investment opportunities overseas (Colombant 2004). Khartoum is equally appreciative of the Chinese attention, and Sudan's Energy and Mining Minister has praised their closest business partner, stating that "The Chinese are very nice...[fjhey don't have anything to do with politics or problems...[fjhey are very hard workers looking for business, not politics" (Goodman 2005). Interestingly C N P C has taken steps to try and appease investors in a way that resembles Talisman's attempts to highlight its positive contributions in Sudan. Starting in 2002 C N P C has published on its English website, a section in its Annual Report entitled "Community" which appears to be dedicated to deflecting public criticisms of some of C N P C ' s controversial 60 infrastructure projects such as the Three Gorges Dam and investments in Xinjiang and Tibet. In 2003 this section provided some details of the company's recent investments, arguing that " C N P C upholds the corporate principle of 'caring and repaying society'" by "supporting and relieving poverty, making donations to local students, and financing cultural and education programs" ( C N P C 2003). The short blurb on Sudan states that " C N P C has begun to participate in various forms of community activities... [and] local residents have benefited from C N P C ' s public welfare projects including the drilling of drinking water wells, the construction of medical and health centers, hospitals and schools, and the supplies of health care equipment and teaching facilities" ( C N P C 2003). While the publication is limited in scope and is clearly being utilized as a public relations tool, its existence is interesting to note. The most recent Annual Report in fact changed the name of the "Community" section to "Corporate Social Responsibility," indicating, at a minimum, that the company is increasingly aware of the international expectations of CSR. SRI Activism and the Governance of CNPC While the SRI campaign against PetroChina largely failed to achieve its desired ends of a) keeping C N P C out of US capital markets, and b) influencing the company's behaviour in Sudan, activists can still lay claim to some small successes. The strength and organization of the SRI campaign against the PetroChina IPO was unprecedented and powerful. First, it was able to raise awareness of C S R issues with both C N P C and PetroChina, who each now publish some type of report on corporate social responsibility and/or health, safety and the environment. 2 5 This behaviour indicates that, at a minimum, both companies are aware of the growing international expectations of global corporations. Second, activists were able to use 2 5 See the PetroChina website at http://vvww.petrochina.com.cn/english/ikaqhhi/ikaqhhi nb.htm. and the CNPC website at http://www.cnpc.com.cn/english/gsgk/gsnb.htm. 61 the SRI campaigns to mobilize the expectations laid out by the C S R agenda, bringing the issue of human rights before the managers of large pension plans and investment funds. In doing so, they succeeded in reducing the value of the PetroChina offering by 71%. Large investment funds have now started to reconsider their investment policies and to establish more rigorous screening processes for investment risk concerns related to C S R . For example, in November 2000 Ca lPERS announced a new policy where investment fund "managers wi l l [now] be selected based on their ability to invest in emerging markets and adherence to the Global Sullivan Principles and the International Labour Organization's Declaration on Fundamental Principles and Rights at Work" (cited in Diamond 2003: 71).26 Finally, the campaign succeeded in catching the attention of key policy-makers in Washington who have expressed growing concern about the ability of foreign firms to raise billions of dollars on U S capital markets. To many investment managers' dismay, the IPO campaign also forced the issue of human rights onto the agenda of the U S Securities and Exchange Commission (SEC), who, in the spring of 2001, dropped a "bombshell" when it announced that human rights violations would now be considered "material" 2 7 for investors. The S E C decision now requires foreign firms to disclose the human rights risks associated with their operations in countries where the United States had imposed sanctions for human rights violations or other legal or national security concerns (Diamond 2003: 40). 2 8 A s Stephen Diamond notes, the S E C decision "represents a significant break with the hands-off tradition in the United States" (Diamond 2003: 40). It was a landmark decision, and as security policy analyst Roger Robinson stated, "the enduring legacy of the PetroChina IPO w i l l likely be that 2 6 The Global Sullivan Principles of Corporate Social Responsibility aim to promote human rights, employment equity, racial and gender diversity, and social, economic and political justice. See the GSP website at http://www.thesullivanfoundation.org/gsp/principles/gsp/default.asp. 2 7 Materiality according to Diamond is "understood to mean all the information that a reasonable investor requires to make an informed investment decision" (Diamond 2003: 76). 2 8 The SEC already had policies in place requiring companies to disclose investment risks related to environmental liability, intellectual property and employee relations (Diamond 2003: 77). 62 non-financial considerations, particularly involving national security and egregious human rights abuses, wi l l henceforth need to be taken into account by the capital market" (quoted in Hiebert 2000: 56). This small success demonstrates the particularly unique way that SRI activists were able to insert the C S R agenda into capital market considerations, bringing the issue of human rights in Sudan and elsewhere, onto the agendas of financial policy-makers and investment fund managers. However despite the efforts of activists, the SRI campaign ultimately did not lead to the desired outcome of forcing C N P C to alter its behaviour in Sudan. The political, strategic and economic investment intentions of C N P C , as well as its financial ties to the Chinese state allow the company to continue to acquire investments in risky states where more transparent and accountable corporations cannot go. Financial backing from the Chinese government, which is both able and wil l ing to bail the company out in times of hardship, ensures that C N P C can remain relatively insulated from market pressures brought on by activist campaigns. For these reasons, company enjoys a downward competitive advantage in the global oil industry, profiting from its comparative invulnerability to SRI campaign tactics, and giving it a competitive edge over more accountable western firms that are increasingly pressed to engage in upwardly mobile C S R behaviour. Chinese companies, and increasingly Indian companies, have been more than wil l ing to fill the void left by retreating western corporations, indicating a growing governance gap in the international oi l industry. This trend fundamentally challenges the governance framework that has been erected by CSR, creating significant obstacles for non-state actors that seek to mitigate the negative social and environmental outcomes of oi l extraction. The next chapter w i l l outline the implications of this growing problem while also discussing the ways in which SRI activists have managed to create new arenas for advancing the C S R agenda. 63 CHAPTER FIVE: Socially Responsible Investment and the New Governance Gap This chapter w i l l discuss the influences of SRI activism, assessing the problems and prospects of using it as a tool to alter firm behaviour, while also looking at larger issues of governance in the oi l industry. This chapter makes two arguments. First, the outcomes of the two cases presented above demonstrate that SRI activism can force a wedge between firms more easily swayed by shareholder pressure and their comparatively less-constrained and politically-motivated rivals, in effect creating a new governance gap within the oi l industry. What is most concerning is that this gap w i l l likely become more problematic as state-owned corporations continue to globalize and cement their influential positions in the international oi l and gas market. Second, I argue that although there may be growing concerns about the governance gap, activists can still claim small successes in utilizing SRI campaigns to insert C S R considerations into the agendas of top corporate managers and key political and financial decision-making bodies. These small successes have facilitated structural and institutional changes and have opened up a new social and political space for non-state forms of governance. To begin I w i l l discuss what the cases of C N P C and Talisman tell us about the future of governance in the oi l industry, drawing attention to the governance gap that has emerged as a result of the SRI activist campaigns. I then argue that regardless of the larger governance failure due to the governance gap, these activist campaigns have created a new space for non-state governance of multinational corporations and have popularized new non-state mechanisms for influencing government policy and market regulatory rules. After presenting the conditions that led to the successful outcomes of the SRI campaigns and suggesting some of the limitations of SRI governance mechanisms, the chapter w i l l highlight the positive 64 governance outcomes of SRI activism and assess the prospects of bringing quasi-state corporate actors into the C S R governance fold. The Governance Gap The cases of C N P C and Talisman Energy demonstrate the emergence of what I argue is a growing governance gap in the oil industry. Talisman Energy, a small independent firm previously considered to be the poster-child of the Canadian oil and gas industry, was targeted by one of the most well-organized C S R campaigns in Canadian history. Initiated by activists keen on forcing companies in Sudan to acknowledge and abide by the standards and expectations of corporate social responsibility, the campaign sought to publicise Talisman's operations, which activists argue, facilitated ongoing war, violence and human rights abuse. B y mobilizing the growing international expectations of C S R , activists were able to use SRI activism as a tool for targeting key corporate interests, namely reputation and profits. B y placing a downward pressure on the company's share price, activists were able to assert their political interests, forcing the issue of human rights and C S R onto the agenda of top management officials. Campaigners were successful at pressuring Talisman into adopting upwardly mobile C S R behaviour. Since the Sudan debacle, the company has taken noticeable steps towards better integrating transparent C S R practices into its business operations, receiving recognition of its efforts from international C S R institutions such as the G R I and the Global Compact. This upwardly mobile behaviour is important to note, demonstrating the campaign's success and the positive ways in which SRI activism can influence corporate policies and actions. There is, however, an important caveat for this finding. While the upwardly mobile behaviour demonstrated by Talisman is significant, it is important to note that policies initiated by top 65 corporate executives may not necessarily translate into more transparent and accountable practices on the ground. As reported by numerous academics studying CSR, there continues to be a significant disconnect between corporate policies and corporate practices (Frynas 2005; Pegg 2006). Talisman is likely to be no exception. 2 9 This disconnect continues to be a significant issue for critics and stakeholders who remain sceptical of the local impact of transnational business practices. I do not discount this vital critique of CSR; however I contend that prompting companies to adopt more transparent and accountable C S R policies should be considered a positive step towards better practice on the ground. This is largely because, at a minimum, such policies provide activists and stakeholders with standards to which they can hold corporations accountable for their actions overseas. The constraints that are placed on transnational corporations through SRI activism however, are not felt by all firms in the oi l sector. The activist pressure that forced Talisman to withdraw from Sudan created a vacuum that less-accountable state-owned firms have been more than wil l ing to fill. In Sudan, India's state-owned oil firm, O N G C Videsh, was eager to purchase Talisman's assets, and Petronas and C N P C have faced very few constraints in their ongoing operations in Sudan and continue to hold large investments there. There is a common perception that these quasi-state entities operate under lower standards and generally have little respect for environmental or social factors. Generally, national oi l companies operate under fewer risk constraints; they can accept lower rates of return on their investments, and their quasi-state status allows them to better withstand shareholder pressure {Petroleum Economist 2005a). At first glance, quasi-state companies such as C N P C appear to lie outside the governance grid articulated by both the private sector model of the international oi l industry 2 9 While it is beyond the scope of this paper to investigate the actual impact of CSR practices on the ground, it remains a pressing question in Sudan and further research is certainly necessary. 66 and the growing expectations of C S R within the industry. Recognizing that the company may lie outside the C S R governance grid facilitates a critical examination of the ongoing constitutive dynamics of governance, as advocated by critic Robert Latham (1999), whereby the terms and conditions of governance are debated and resisted by various actors in the global system. Specifically, C N P C ' s position presents a significant challenge to C S R as presently conceived. Tactics used to target independent western oi l firms have had limited success in influencing the business practices of their quasi-state counterparts, and state-owned companies can, in fact, benefit from the increasing C S R constraints placed upon western firms. Because of its quasi-state status, C N P C and companies like it have been charged with engaging in "asymmetric warfare" in the oi l industry (The Economist 2005). C N P C ' s financial ties to the Chinese state, as well as its political and strategic motivations, allow it to remain relatively unhindered by concerns of the social or environmental impact of business operations, and the company can often practice a strategy of "business as usual" when faced with social and environmental risks. In fact, C N P C ' s place outside of the C S R governance grid allows it to gain significant benefits in its search for cheap oi l , gaining a competitive edge over its rivals because of its relative invulnerability to the international expectations of C S R . A similar argument is made by Scott Pegg (2006) who suggests that a "geographic division of labour" is emerging whereby bottom-feeder o i l firms that have generally shunned C S R , are turning their invulnerability to consumer and N G O pressure into a core aspect of their business practice. I describe this behaviour as C N P C ' s downward competitive advantage: the company benefits from less-accountable and less-transparent practices and C N P C ' s success relies on its political and strategic ties to the governments with which it does business. This downward C S R behaviour allows it to go where western firms are increasingly unwilling or unable to go for reasons of C S R and SRI activism. 67 As a result of the upwardly mobile CSR behaviour of western corporations and the comparative downward behaviour of state-owned firms, a governance gap has emerged. SRI activist campaigns have facilitated the creation of this gap by forcing a wedge between two types of so-called bottom-feeder corporations. Bottom-feeder western firms, despite their unassuming nature and low profile, are more easily targeted by SRI activists and are more vulnerable to attacks on their share price and financial profits. Quasi-state firms, on the other hand, can fall back on state governments to insulate them from activist pressure. Where one company has been pushed into adopting more transparent and comprehensive CSR policies, the other continues to enjoy its competitive edge as a less-constrained transnational firm with political and strategic motivations. This governance gap is particularly concerning for two reasons. First, the oil industry's track record on human rights and the environment demonstrates a notable lack of adequate social and environmental safeguards. This problem is compounded by the empirical evidence of transnational oil firms becoming directly involved in violence and human rights abuse around sites of oil extraction (Pegg 1999; Forcese 2001; Frynas 2005). Second, the governance gap is concerning because of the growing significance of globally competitive state-owned firms. Currently half of the 50 largest oil companies are fully or majority state-owned. Surprisingly, the oil industry giants such as Shell, ExxonMobil and BP own a mere 5% of global oil reserves, and nearly 90% of the world's oil reserves are held by partially or fully state-owned oil companies (see Appendix D) (Miller 2003: 45; The Economist 2005). While the largest reserves are held by domestic companies from the Middle East (see Appendix E), large transnational state-owned oil firms such as CNPC, ONGC Videsh, Petronas (Malaysia) and Petrobras (Brazil) are emerging as some of the largest transnational corporations from developing countries (see Appendix F). These companies have started to 68 gain industry experience and develop sophisticated technology, allowing them to expand from their traditional roles as domestic producers and distributors to become key players in the international oi l and gas market. As a result, they are becoming a more formidable force in the global economy, increasingly competing with and operating alongside some of the industry's largest and most competitive global firms. While national oil firms from large developing countries continue to lack the brand-power and economies of scale enjoyed by the industry's 'super majors,' they often outbid many of the large western firms, and are continually finding new ways to undercut established companies within the industry. 3 0 In September 2005, China and India announced a new initiative, vowing to cooperate in overseas o i l and gas acquisitions and takeovers. Aimed to stop bidding wars between the two countries which often resulted in oi l exploration and production contracts being awarded to third parties, the new agreement wi l l "create a powerhouse asset purchaser that w i l l be able to bid for any oi l or gas target, no matter how big' (Francis 2005). A memorandum of understanding has been signed by the largest Indian and Chinese firms, including C N P C and O N G C Videsh, creating a countervailing force to the dominance of American and European companies in the industry (Francis 2005). This strategic move signals that these state firms are serious about their internationalization strategies, which increasingly target valuable oi l reserves in risky developing countries where issues of human rights and the environment are particularly salient. In addition, the governance gap raises concerns about the ability of corporate social responsibility, and more specifically socially responsible investment activism, to govern the behaviour of large quasi-state firms in the future. The cases presented here prompt questions 3 0 In addition to their aggressive exploration and production contract bidding, state-owned firms, particularly Chinese companies, have also been actively involved in mergers and acquisitions in North America, which has sparked debate and controversy in the industry and policy-making communities in industrialized countries. 69 about the utility of SRI activism, particularly when campaign tactics result in the retreat of western firms and their quick replacement by less transparent and less accountable companies. Stephen Frost and Mary Ho (2005) identify a similar problem in Burma where retreating western firms have been replaced by large Asian multinationals, raising questions about the impact this trend w i l l have on labour and human rights standards in the country, as well as on the international sanctions regime erected against Burma. The questions raised about the effects of these new global players on the C S R governance framework certainly warrant further investigation. To this end, the seemingly negative outcome of the SRI campaigning activities against C N P C and Talisman highlighted here makes a minor contribution. In some ways, the cases reaffirm the criticisms of C S R sceptics who argue that C S R is nothing more than a corporate tool used to enhance corporate competitiveness. These cases confirm this argument by demonstrating how companies use their upward or downward C S R advantages to create a competitive edge to enhance their corporate image or improve their prospects for contract bidding. However, as the next sections wi l l demonstrate, it is clear that the impact of SRI activism reverberates beyond the firm level where the minimal "business case for C S R " still holds the most sway. The size, organizational capacity and influence of these campaigns were unprecedented, and while their successes were small, the campaigns sent a powerful message to corporations and political and economic decision-makers about the impact and influence of non-state governance tactics. New Spaces for Non-State Governance Activist opposition to the operations of Talisman Energy and C N P C in Sudan are just two examples of the increasing desire and ability of non-state actors to engage in and wield powerful market mechanisms of governance. Despite the overall negative outcome of what is 70 described here as a growing governance gap in the oi l industry, the SRI campaigns targeting Talisman and C N P C have led to some small but notable successes, with potentially wide-reaching implications. B y inserting C S R issues into the agenda of key financial decision-making bodies in the United States, activist succeeded in creating a new space for non-state actor influence, which I argue, is likely to have increased significance as globalizing state firms are forced to confront and engage with the established financial regulatory regime. Particularly important are the structural and institutional changes that have resulted from the objections raised by the SRI campaign that targeted the public listing of C N P C ' s subsidiary, PetroChina. As explicitly outlined in chapter four human rights activists vocally opposed the N Y S E listing of PetroChina on the basis that its parent company has been both directly and indirectly complicit in grave violations of human rights in Sudan, including forced displacement, rape and murder. Integral to the activists' argument was the valid concern over the potential for capital raised on the N Y S E to be used to aid the violent actions of the Sudanese government. A s a result of the outrage expressed by activists and investors, human rights related issues are now considered a key component of S E C investment risk assessment for foreign companies. Accordingly, non-disclosure of human rights risks carries with it significant penalties. The implications of this decision are clearly understood by supporters and opponents alike. One critic noted that in granting human rights violations the status of a material risk, there is potentially no limit to the scope of options available to pressure groups that could now use S E C disclosure, investigation and enforcement mechanisms for their own political ends (Steil 2005: 55). B y inserting the C S R agenda into a relatively conservative regulatory body with a history of political apprehension, SRI activists successfully created a new space for non-state actor influence. A s stated by Stephen Diamond, the landmark S E C decision "chose to bring 71 politics into the capital market where they are manifestly unwelcome... [t]hus, it forced the recognition of the political impact and relevance of those markets" (Diamond 2003: 101). The decision has ensured that the concept of corporate social responsibility, which stipulates that corporate actors must, at a minimum, ensure that they do not facilitate, condone or benefit from violations of human rights, has found a new place to articulate and assert the standards, regulations and expectations being slowly adopted at the firm, industry and international level. In essence this creates a powerful new arena for non-state actors to raise objections about the policies and behaviours of large foreign multinational companies. It also expands the space for debate and contestation of current mechanisms of governance within the international financial arena, cornering decision-makers into engaging in a more critical discussion and debate about the broader social, environmental and political impact of unbridled transnational corporate expansion. Limitations and Conditions for Success in SRI Activism Thus far I have suggested that the activist campaigns launched at C N P C and Talisman Energy have wielded significant power and influence first, by shaping the behaviour of international firms, second, by inserting issues of C S R into the agendas of top management officials and key political decision-makers, and third, by affecting political and financial outcomes at the state level. Yet of course, there may be limits to the ability of SRI activism to bring about meaningful, large-scale and long-term change. A s Peter Newell notes, the tools and strategies that have proven successful for holding corporations accountable, such as placing a downward pressure on corporate share price through SRI activism, are not strategies generally available to poor, less-mobilized stakeholders in developing countries (Newell 2005: 542). Indeed, SRI activism remains a tool of wealthy western populations that have the 72 financial resources and political capability to articulate their objections to unethical corporate behaviour. In addition, SRI activism may also have a more limited effect due to the operations of small privately-owned firms that often make it their business mandate to benefit from war and instability. Small private companies continue to operate under the radar of most activist campaigns and are generally unconcerned about CSR, SRI activism, or the larger debates about the governance of corporate activity (Pegg 2006). Finally, SRI activists may face added challenges in creating meaningful change at the firm level, as the evidence that I have presented here refers only to the impact of SRI campaigns on the US stock exchange system. A more comprehensive assessment of the success of SRI activism in the oil industry would necessitate further examination of other international capital markets in Europe and Asia, keeping an eye to the ongoing development of viable and lucrative capital markets within China. A decision made by the Russian oil firm Lukoil to move its IPO from the NYSE to the London Stock Exchange following the PetroChina campaign, suggests that capital market restrictions in the US may have a dampened effect on firm behaviour when companies are given the option to list elsewhere. The Hong Kong stock exchange may be especially important to examine in the case of China because of the longer history of Chinese investment there. Currently, evidence suggests that PetroChina's listing in Hong Kong has been quite successful, and it could potentially provide a lucrative alternative to American capital markets. This may ultimately limit the ability of the institutional changes discussed above to have a meaningful influence on state-owned firms in the future (Steil 2005: 54). In addition, the conditions that led to the profound influence of the SRI campaigns that targeted Talisman and CNPC were by no means ordinary and activists may face future challenges in reproducing similar campaigns. First, the war and ongoing human rights abuse in 73 Sudan presented the international community with serious problems over the years, as U N bodies and numerous heads of state attempted to reign in state-sanctioned violence by using state mechanisms of governance. Various initiatives had been tabled at the U N proposing to take action against Sudan for ethnic and religious discrimination and grave violations of human rights, but powerful tools presented to the U N Security Council, such as comprehensive international sanctions, were struck down, often by China who opposed any hostile actions against the. country. Sudan had therefore presented a problem for the international community and, save for US sanctions erected in 1997, little government action had been undertaken to deal with the Sudan problem. The SRI campaigns therefore benefited, to a large extent, from the high international profile of the case of Sudan as well as from the impasse reached at the international level, whereby states had little power to influence the behaviour of the violent regime. Both campaigns also benefited from a broad base of support from both the left and right sides of the political spectrum. In the case of Talisman, religious, human rights and anti-slavery activists were assisted by a coalition with U S lawmakers concerned about terrorism and American security interests. This convergence of interests was instrumental to the success of the Talisman campaign. While U S public officials provided the political clout for proposed threats of capital market sanctions on Talisman, it was the activists and SRI campaigners who were responsible for mobilizing the broad-base of support and for publicising the unethical behaviour of the company. In addition, activists were successful at framing the issues of human rights, religious freedom and anti-slavery in the language of investment risk and financial sustainability, gathering further support from the powerful investment and pension plan communities which played a crucial role in pressuring Talisman to alter its behaviour. 74 Similar conditions were also instrumental to the outcome of the PetroChina campaign. This campaign saw the marriage of left and right, with actors on both sides of the political spectrum expressing grave reservations about the PetroChina IPO. Right-wing religious organizations and left-wing human rights activists were united in their opposition to C N P C ' s attempt to raise capital on US stock markets; and left-wing government officials cited humanitarian concerns while right-wing politicians cited national security concerns and the looming 'China Threat' in their respective objections to the IPO. In addition, labour and environmental groups maintained an interest in the outcome, bolstering the influential sway of the activists and oppositionists of the PetroChina listing. SRI activists were able to utilize this broad base of support to garner wide-spread backing for its pre-emptive divestment campaign, successfully lobbying a wide range of investment management firms to boycott the PetroChina stock for both ethical and financial reasons. A s a result of activist efforts, the coalition put billions of dollars at stake, resulting in a severe blow to C N P C ' s debut on American capital markets. The factors identified here as being responsible for the success of the Talisman and C N P C campaigns are consistent with the factors that academics have identified as salient in successful transnational activist campaigns. Keck and Silddnk (1998), together considered to be perhaps the foremost authority on transnational activism in the field of political science, identify similar characteristics such as issue framing, dense and broad-based networks of actors and issue resonance as important determinants of successful transnational advocacy campaigns. B y constructing or framing the problem of corporate complicity in human rights abuse and violence in different ways, highlighting investment risk, national security and corporate irresponsibility as potential problems, SRI activists were able to communicate their C S R concerns to their target audiences more effectively, gaining the attention and support of key 75 actors from both sides of the political spectrum and in various economic and political sectors. In the end, it was these key factors which led to the campaign's unprecedented success. Similar campaigns have also attempted to target large transnational oi l companies. Shell and Exxon have seen their fair share of boycotts and protests, but certainly few campaigns can lay claim to the same level of success as has been seen in the cases of Talisman and C N P C . Corporate support for the Burmese military junta is one issue that resonates with activists, and investment firms have been targeted by a similar campaign seeking to force companies out of Burma. However, while displaying similar characteristics to the Sudan campaign, it has arguably not enjoyed the same level of success. Whether a campaign as wel l -mobilized, organized and successful as those launched against Talisman and C N P C w i l l materialize again depends on the salience and visibility of the issue, and on the ability of activists to gather a broad base of support for shareholder action. While it may be difficult to replicate a campaign of similar size and influence, SRI activism continues to gain momentum, r and the potential of SRI to become an influential arena for non-state actor governance is clearly apparent, as shareholders, pensioners and investment fund managers continue to seek inventive new ways to influence the behaviour of transnational corporations. SRI as Governance The governance outcome of SRI activism has potentially wide-reaching implications, qualitatively transforming firm, industry and investor perceptions of risk, and placing both systemic and normative constraints on corporate behaviour. There are many indications that the effects of the Talisman and C N P C campaigns reverberate within and beyond the international oi l industry. First, Talisman's withdrawal from Sudan has certainly awakened the international business community to the potential effects of SRI activism, and as a result, 76 issues of corporate social responsibility, environmental protection and human rights appear to be on the radar of most corporate executives and boards of directors. As previously suggested, statements and policies on C S R , community engagement and sustainable development have become key components of any large oil company website and C S R reporting is becoming increasingly common among many global oi l firms. C S R has since become an integral part of public relations campaigns to win the hearts and minds of current and potential investors, reassuring them that business operations are undertaken in good ethical conscience. There is also some evidence that C S R holds increasing sway in Asia . Chambers et al. (2003) conclude that although considerable national distinctiveness continues to exist among Asian states, "waves" of C S R are being implemented in Asia . Interestingly Chambers et al. also found that firms that operate internationally are more likely to engage in C S R and institutionalize it through codes of practice. Limited corporate surveys done by Welford (2004; 2005) also make some tentative conclusions about the increasing importance of C S R to Asian executives, and a recent survey produced by H i l l & Knowlton (2004) suggests that Chinese C E O s are increasingly incorporating C S R into their business considerations, even though the practice remains in an early stage of development. It is becoming clear to many companies that the pressures brought on by SRI campaigning activities are real and can have dire consequences for corporate profits. A s a result, Talisman's withdrawal from Sudan has not been an isolated event. Other western firms have faced similar pressure from activists and politicians because of their tacit support for Khartoum and their complicity in war and violence in Sudan. In M a y 2003, shortly after Talisman left, Sweden's Lundin O i l sold its Block 5A assets to the Malaysian firm Petronas, and the Austrian firm O M V closed a deal shortly thereafter selling its stakes in Blocks 5 A and 5B to the Indian multinational O N G C Videsh (Katsouris 2003). Indeed some statistics suggest 77 that this retreat from overseas is a growing phenomenon. The National Post recently reported that Canadian oil majors are retreating from risky overseas investments, largely because of the demonstrated effects of campaigns such as the one launched against Talisman. The article notes that Canadian oil production from foreign assets w i l l decline by at least 33% through 2006, suggesting that "political risk turned out to be a bigger headache than they had anticipated, making those cheap, abundant foreign barrels not worth the hassle" (Cattaneo 2005). While it is not clear i f this Canadian trend is representative of all western oil firms, at the very minimum the withdrawals from Sudan and the Canadian retreat from overseas suggests that greater constraints are being placed on western firms requiring them to conduct their behaviour in accordance with the growing expectations laid out by C S R . The Talisman and C N P C campaigns have also educated investors about the potential ramifications of supporting irresponsible or unethical business practices. Large, powerful pension plans in Canada and the United States such as the Ontario Teachers Federation, Ca lPERS and the T I A A - C R F have started to look to international C S R performance and reporting standards such as the EITI, GRI , U N Global Compact and others3 1 for investment guidance, and social and environmental factors are being integrated into investment screening processes alongside issues of corporate structure and long-term financial stability. A sizable institutional apparatus has built up around SRI issues, with investment management firms becoming increasingly sensitive to the international expectations, standards and norms emerging out of the C S R movement. For example, F & C Asset Management, a large investment management firm in the U K , evaluates risks and seeks assurances from companies with operations in Sudan and Burma, ensuring they have implemented adequate C S R policies 3 1 Other such CSR standards and mechanisms include the CERES Principles, the Global Sullivan Principles, ISO 14001, SA8000, and the UN Human Rights Norms for Business (yet to be formally adopted), to name just a few. 78 and procedures. The capital market has similarly responded to the demands of socially and environmentally-conscious investors, providing options to participate in socially responsible investment indexes such as the Dow Jones Sustainability Index or the FTSE4Good index. A s a result of these institutional changes and the growing sensitivity of investors and shareholders to issues of corporate social responsibility, academics suggest that in fact, the socially responsible investment movement has reached a level of maturity, shifting the practice of SRI from the margins of retail investment into the mainstream philosophy and procedures of large investment firms and pension funds (Sparkes and Cowton 2004). Corporate social responsibility issues have also infiltrated the institutional apparatus of the US court system where victims of human rights violations have sought justice and compensation for corporate crimes committed overseas. A number of high profile cases including one against Talisman have been filed against corporations under the U S Al ien Tort Claims Act , subjecting companies to c iv i l litigation for suspected violations of international law. A s argued by Ronen Shamir (2004: 636), the growth in the number of A T C A cases in the past decade signals an attempt by non-state actors,to consolidate the standards and expectations of C S R around legally binding duties, a move remarkably similar to the attempt by SRI activists to insert the C S R agenda into the formal regulatory structure of U S capital markets. There is great potential for this growing momentum in the legal, financial and investment communities to encourage further policy and behavioural change in large quasi-state entities that continue to benefit from the upwardly mobile behaviour of western firms and that have thus far eluded SRI governance tactics. Institutional changes in American capital market regulation and changing perceptions in the global corporate and financial investment communities w i l l not remain insulated in the current era of economic globalization and 3 2 For more information see the F & C website at http:/7www.fandc.com/aboutus.asp?pageid=l .3.3.4.]. 79 complex financial interaction. C S R is likely to have increased influence as state-owned firms pursue their 'go out' strategies of expansion and internationalization since arguably it is inevitable that, in seeking out new sources of financial capital, state-owned firms w i l l increasingly be required to partake in the global financial infrastructure and participate in industry rules, norms and regulations. Certainly, the long-term viability of these new global actors requires them to engage in the established governance framework that informs both the international oi l and gas industry and the western investment community. There is a possibility, therefore, to nudge large state-owned oi l firms into greater compliance with the growing expectations of C S R , which have now been inserted into the regulatory structures of the American investment apparatus and are increasingly given a higher priority by shareholders and key investment management firms. There may also be a larger process at work here. Leslie Sklair and Peter Robbins (2002) argue that the rise of a transnational capitalist class 3 3 w i l l ensure that differences between first and Third World corporations w i l l diminish over time. To the extent that an outward-oriented transnational class of global corporate managers and market-capitalist elite is emerging, it is possible to envision a convergence of corporate ideology, policy and practice as corporations increasingly see themselves as global economic players rather than a product of their own national economy (Sklair and Robbins 2002: 97). A s C S R becomes further entrenched in the institutional apparatus of the global financial structure, it could potentially become an integral part of the transnational elite's financial and investment decision-making. Clearly this suggestion is simply speculation, however given this argument, the success of SRI activists in inserting the C S R agenda into the current financial infrastructure and the decision-3 3 Sklair and Robbins (2002: 83) describe the transnational capitalist class as comprising of transnational corporate executives, globalizing bureaucrats, globalizing politicians and professionals, and consumerist elites (international merchants and media). 80 making considerations of CEOs and investment funds could potentially have wide-reaching effects on globalizing state-owned firms in the future. Enabled by the new governance space created by SRI campaigning, non-state actors have become instrumental governance entrepreneurs in the fight to bring large transnational corporations into the governance fold. The future successes of C S R and SRI activism relies on the extent to which activists, N G O s and investors can bring transnational state-owned firms into the current governance grid and subject them to C S R constraints through institutional and normative standards and regulations. I do not want to suggest that activists can claim a complete victory. Certainly the struggle continues between activists, policy-makers and corporations to define the terms of the C S R debate and shape the outcome of SRI campaigning. Indeed the corporations have a very clear interest in the result. Interestingly, bringing quasi-state firms into the C S R governance fold may actually be in the competitive interest of established oil majors, who could gain a competitive edge over their state-owned rivals by having already implemented a recognized and legitimate framework for C S R policy, practice and reporting. This incentive gives established firms added reason to subject state-owned companies to the governance agenda of C S R . To sum up, this chapter has argued that while large state-owned oi l firms appear to lie outside the governance grid enjoying a downward competitive advantage from their invulnerability to SRI activism, these firms may increasingly be required to engage with the expectations and standards espoused by C S R as they continue to expand their operations overseas. Activists have been instrumental in facilitating this outcome by using their power and influence to wield market mechanisms of governance, creating a new space for political activism aimed at the behaviour and policies of large transnational corporations. The outcome examined here is intriguing, and particularly relevant to the study of economic globalization, 81 corporate transnationalization, corporate social responsibility and global governance. The following chapter w i l l highlight these important contributions to the field of global politics by summarizing my arguments and providing some directions for future research. 82 CHAPTER SIX: Conclusion The detailed discussion of C N P C and Talisman Energy in Sudan reveals what I argue is a growing governance gap in the oi l industry. The campaigning activities of SRI activists have created a dynamic in which some firms are able to use their quasi-state status to gain a competitive edge over their rivals, while other firms must compete under the constraints posed by progressively higher C S R standards. However, despite the inability of activists to influence the behaviour of state-owned firms from the Third World, they may still lay claim to some small victories for CSR, demonstrating how non-state actors can play an instrumental role in influencing corporate behaviour. This chapter w i l l summarize the major arguments presented in the thesis, describing the practical and theoretical contributions of this research, before suggesting some directions for future studies. The outcome of the Talisman campaign is a compelling demonstration of how non-state actors can use the power of the market as a mechanism of governance. Activists were successful in using market mechanisms of governance to pressure the company into altering its behaviour, bringing its policies further in line with international expectations of C S R . The campaign forced the issue of human rights and civilian displacement onto the management agenda of top corporate officials, and further prompted Talisman to publish detailed accounts of its overseas activities in annual C S R reports. B y engaging the company in a dialogue about responsible business practices and the adverse effects of oi l extraction in unstable and war-torn states, activists successfully pressured Talisman to incorporate the principles and practices of good corporate conduct. Steps taken by the company to better integrate C S R into its business operations were significant, but were ultimately unable to appease investors and human rights advocates who successfully lobbied the company to withdraw from Sudan. When the sale of Talisman's Sudan assets was finalized in 2002, SRI activists could lay claim to a small victory 83 for CSR: the campaign played a significant role in prompting the company to both leave Sudan and adopt more transparent and comprehensive C S R policies. However despite this apparent 'success,' many critics pointed to the ongoing involvement of state-owned firms in Sudan. They lamented Talisman's withdrawal, calling it a hollow victory for campaigners. Similar SRI campaign tactics have been comparatively unsuccessful at influencing the behaviour of C N P C , revealing the limited capacity of non-state actors to influence the behaviour of state-owned corporations. C N P C continues to operate in the most sensitive areas of southern Sudan where human rights and environmental issues are particularly salient, and where the adverse effects of oil production are disproportionately felt. A l l is not lost however, as the PetroChina campaign can lay claim to some small successes in the fight to bring large quasi-state entities into the C S R governance fold articulated by the international expectations of responsible corporate conduct. First, the widespread concern expressed by activists, N G O s , investors and government officials subjected PetroChina to public criticism and condemnation, resulting in a 71% decrease in its initial public offering and forcing Chinese decision-makers to reconsider their entry into U S capital markets. Since the IPO, both C N P C and PetroChina have paid lip-service to C S R on their corporate websites, stating their commitment to sustainability, the environment and workplace health and safety. This response indicates that both companies are, at a minimum, aware of the growing expectations of C S R , yet, whether this rhetoric w i l l result in significant action on the ground remains to be seen. The PetroChina campaign was also successful at inserting human rights considerations into the decision-making apparatus of American capital markets, altering the requirements for large foreign companies seeking access to lucrative sources of capital. This outcome has produced effects that reverberate beyond the cases discussed here, as corporations and institutional investors have been forced by both the regulatory changes of the U S Securities 84 and Exchange Commission and the growing demands of shareholders to alter their conception and evaluation of material risk. Some critics have expressed concern about the S E C decision, suggesting that it w i l l allow for the politicization of the U S stock market system. Indeed this decision has created a new space for political activism, giving human rights advocates an institutional mechanism to limit the revenue-raising abilities of foreign firms deemed irresponsible and unresponsive to the international expectations of C S R . The Talisman divestment campaign and the objections raised by the PetroChina IPO have also awakened CEOs , investors and shareholders to the consequences of SRI activism. The case of Talisman demonstrated that not only can shareholder and activist pressure tarnish the reputation of an inconspicuous western corporation, it can also have real effects on corporate share price and ultimately on the company's financial bottom line. Similarly, the PetroChina debacle has sent a clear signal to foreign firms looking to list in the United States. In addition, both campaigns reveal that there is a growing movement of investors who are no longer wil l ing to be associated with companies whose operations support governments that rape, murder and drop bombs on civilians, and a growing industry of ethical or socially responsible investment funds and social screening processes is emerging to meet these growing demands. Certainly there are limits on the extent to which SRI activism can have a meaningful impact on corporate behaviour. There remains a troublesome disconnect between corporate policy and corporate practice where standards and regulations adopted at the executive level often do not translate into action on the ground. There is also concern about the impact of the S E C decision on corporate behaviour i f foreign firms opt to move their initial public offerings to Asian stock markets rather than comply with the appropriate human rights standards and reporting practices. In addition, small privately-owned firms whose business it is to specialize 85 in zones of conflict and unstable states remain outside of the C S R framework and continue to operate under little public scrutiny with few concerns about ethical business practices. These limitations are concerning, but not insurmountable. The increasing popularity of social and environmental investment screening processes and the growth of sustainable and socially responsible investment stock options demonstrate that C S R issues are increasingly informing investor and shareholder perceptions of risk. A s a result, globalizing firms seeking to benefit from the large amounts of capital that these investors offer w i l l increasingly be required to engage in the established C S R governance framework. The research presented here has important practical implications for the investment and shareholder communities, providing them with valuable information about the problems and prospects of using SRI activism as a tool for governing the behaviour of transnational corporations. The outcomes of the two cases suggest that shareholder and investor activism can have an impact on firm behaviour, therefore it is important to recognize the value of engaging in a dialogue with corporations about business ethics and corporate social responsibility. The conditions for organizing successful SRI campaigns also have an important practical application. The outcomes of the Talisman and PetroChina campaigns reiterate the conclusions made by Keck and Sikkink (1998), who suggest that activists can be most successful when they have a broad base of support and when the issue is framed in a way that resonates with the values and interests of the campaign target. These findings can give direction to activists looking to organize influential SRI campaigns in the future. That being said, I would like to point out that influence can start at the individual level. Individual investors have a powerful tool in that they can, in a sense, put their money where their values are, investing only in companies that display an appropriate level of responsibility and refusing to invest in companies that are unresponsive to CSR. This conclusion suggests that individuals 86 have agency, and enabled by the new space created for political activism, individuals can use this agency to wield powerful market mechanisms of governance. These new dimensions of political activism have important theoretical implications. Exercising political opinion through the market is increasingly becoming an important tool of global governance as non-state actors seek to influence the actions of large independent and state-owned corporations whose operations adversely affect political and social dynamics in developing countries. This appears to be an important area of research, yet to date, political science scholars with an interest in the politics of global governance and corporate social responsibility have yet to critically examine the emergent governance issues related to the overseas expansion of quasi-state corporate entities. This gap in the literature is concerning given the fact that state-owned firms continue to internationalize at an increasingly rapid rate, cementing their position as important global players. This thesis has tried to fill this gap by providing insight into the impact that state-owned corporations may have on governance in the international oi l industry as well as by highlighting the role that SRI activism can play in steering the behaviour of these quasi-state entities. Further academic study in this area is certainly necessary, as many questions remain unanswered. Particularly revealing would be an investigation into the differences between how Chinese and Indian state-owned firms view and implement C S R . Research into the expansion of Chinese firms into Southeast As ia is inconclusive, raising more questions than answers about the potential challenges that Chinese outward investment poses for C S R (Frost and Ho 2005); and to date, I can identify no studies on C S R and the outward expansion of large Indian firms. Furthermore, it remains unclear whether some state-owned firms are more susceptible to SRI activism and public pressure than others. More information about the prospects of using SRI activism as a governance mechanism may be revealed by comparing the SRI 8 7 campaigns discussed here with similar campaigns against other oil firms, or by examining the different outcomes of SRI campaigning in the oi l sector as compared to say, the mining sector. Finally, a more general analysis of the ultimate impact of the overseas expansion of state-owned corporations on corporate social responsibility and on global governance is a key area for future research. Yongjin Zhang (2005) suggests that the rise of China and the movement of Chinese corporations overseas w i l l create a host of challenges for governance in the current global economy, and Scott Pegg (2006) is ultimately critical of the ability of C S R to influence these firms and create positive change at the aggregate level given that the current C S R regime continues to reward corporate self-interest, market competition and profit maximization. In this thesis I have argued that the future of governance in the oil industry depends greatly on the ability of non-state actors to use market mechanisms in order to bring these state-owned firms into the C S R governance fold. To this end, I have suggested that SRI activism is playing an important role in pressuring corporations to adopt more responsible and transparent corporate practices. Clearly, research examining the political implications of this powerful mechanism of governance is lacking, and therefore the conclusions presented here on the dynamics and processes of SRI activism can be seen as a first step in this investigation, suggesting, perhaps, that the outcome of activist campaigning activities may not be as simple as one of transnational firms using their upward or downward competitive advantage to undercut the competition and undermine the C S R regime. Rather, a more complex picture emerges whereby non-state actors are increasingly able to engage in and wield powerful market mechanisms of governance creating new spaces for debating, contesting and influencing the outcomes of global governance. 88 WORKS CITED A F L - C I O . 2000. 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Basingstoke, Hamshire; New York, N Y : Palgrave Macmillan. . 2005. China Goes Global. The Foreign Policy Centre [cited 25 Aug 2005]. Available from http://fpc.org.uk/fsblob/449.pdf. 95 APPENDIX A: Outward Foreign Direct Investment 1990-2004 (selected developing countries) Developing Countries Outward FDI 1990-2004 Z3 Outward FDI stock -As a percentage of GDP 1990 2000 2003 2004 (n/a) Year Source: UNCTAD (2005b) China's Outward FDI 1990-2004 l Outward FDI stock -As a percentage of GDP 1990 2000 2003 2004 Year Source: UNCTAD (2005b) India's Outward FDI 1990-2004 1990 2000 2003 2004 Year . I Outward FDI stock -As a percentage of GDP Source: UNCTAD (2005c) APPENDIX B: Sudan M a p of O i l Concessions (2002) Blocks Oil and Gas Concession Holders 1 (Unity} Greater Nils Petroleum Operating Company: 2 (Hegiig) Talisman Energy Inc. (Canada). 4 (Kaikang) Pelronas Carigali (Malaysia), Sudapot (Sudan) and China National Petroleum Corporation (CNPC) 7 (kWut) 5A SB Gulf Petroleum Corporation (Qatar), Sudapet (Sudan) and Chins National Petroleum Corporation (CNPC) LundXn OM ABftnternstional Petroleum Corporation (IPC) (Sweden), Petronas Carigali (Malaysia), OMV Sudan Exploration GmbH (Austria) and Sudapet (Sudan) Toteli=ina£Ff'''' S A U AR A 0 I B i A R / . E G Y P T Adinmtstratrve Boundary \ r Source: Human Rights Watch 2003, Available at http://www.hrw.org/reports/2003/sudan1103/2.htm 9 7 APPENDIX C: Updated List of Oil and Gas Concession Holders, Sudan (2004) Blocks 1, 2 ,4 G N P O C ( C N P C , O N G C Videsh, Petronas, Sudapet) Blocks 3, 7 C N P C , Petronas, Sudapet, G u l f Petroleum Corp (Qatar), Sinopec, Al-Thani Corp ( U A E ) Block 5A Petronas, O N G C , Sudapet Block 5B Petronas, O N G C , Sudapet Block 6 C N P C , Sudapet Source: Middle East Economic Digest (2004) APPENDIX D: Global Oil Reserve Ownership by Corporation Type (2000) Upstream Companies 81% Source: Miller (2003: 45) Upstream Oil Independents Small, independent firms that concentrate solely on oil exploration and production (including Talisman Energy and Unocal) Integrated Majors Large companies with the capacity for global production, transport, refining and marketing, smaller than the super majors Super Majors Large integrated (upstream and downstream) globally competitive firms (including ExxonMobil, BP and Shell) Semi-Private National Oil Companies Partially privatized state-owned corporations (including PetroChina) National Oil Companies Wholly state-owned firms that control national production (including CNPC and many large national firms from the Middle East) 98 APPENDIX E: Top 15 Global Oil and Gas Companies (ranked by reserves) Rank Company Reserves (millions of barrels) 1 Saudi Aramco (Saudi Arabia) 261,698 2 INOC (Iraq) 112,500 3 K P C (Kuwait) 96,500 4 N I O C (Iran) 89,700 5 P D V (Venezuela) 77,685 6 A D N O C (United Arab Emirates) 53,790 7 Pemex (Mexico) 28,260 8 Libya N O C 23,600 9 Lukoi l (Russia) 14,280 10 Gazprom (Russia) 14,092 11 N N P C (Nigeria) 13,500 12 Qatar Petroleum 13,200 13 Yukos (Russia) 11,769 14 Exxon Mob i l (US) 11,561 15 PetroChina (China) 11,032 Source: Orr(2003: 85) APPENDIX F: Top Oil & Gas Corporations from Developing Economies (2003) Ranking >y UNCTAD's Top 50 non-financial developing country corporations Foreign Assets TNI* Corporation Country 3' 42 Petronas Malaysia 8 46 Petrobras Brazi l 13 50 China National Petroleum Corp. (CNPC) China 26 9 China Resources Enterprises China 27 49 O i l & Natural Gas Corp. ( O N G C ) India 38 48 China National Offshore O i l Corp. ( C N O O C ) China * TNI is the abbreviation for Transnationality Index. It is calculated by U N C T A D as the average of three ratios: foreign assets to total assets, foreign sales to total sales and foreign employment to total employment. It can be understood here as a ranked measure of the transnational reach of state-owned oil firms. Source: Adapted from U N C T A D (2005d) 99 


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